Unsustainable, Fragile, Overvalued And Under Attack: The Case For Going Short Herbalife Now

Connor Davidson profile picture
Connor Davidson


  • The short thesis presented by Pershing Square is compelling and should be taken very seriously.
  • Herbalife trades at a valuation that does not reflect the huge regulatory risk, default risk and weakness of the balance sheet.
  • The company is fundamentally unfixable and cannot operate as anything other than an MLM.
  • The entire MLM industry is, at its core, fundamentally flawed. The substantial majority of MLM participants lose money, and criticism of the industry is growing.
  • Herbalife possesses the necessary characteristics for a short: high valuation, limited stock upside, unsustainable and financially distressed.

Charlie Rose once said to Steve Wynn of Wynn Resorts (WYNN) on 60 Minutes, "The only way to win in a casino...", and Wynn completed the sentence by saying: "is to own one", then added, "unless you're very lucky". Herbalife is very much analogous to a casino, though for the bottom-of-the-pile punter, the odds are much worse. Perhaps if things get much worse at Wynn, the company could rebrand the casino as a business opportunity. Similarly, Michael Johnson, CEO of Herbalife (NYSE:HLF), once allegedly (according to the NY Post) described Herbalife as a lottery ticket. Although this is closer to reality than some other statements about company, it's still not entirely correct. Since the Herbalife marketing plan is a pyramid (try drawing it), a distributor of average means joining now with a substantial upline extending to an incumbent Chairman's Club member in a mature Herbalife market has, realistically, no chance of joining the Chairman's Club. Given the structure of Herbalife's Royalty Override Points (ROPs), it is practically impossible for this new distributor with a substantial upline to get to the President's Team or Chairman's Club, as ROPs explicitly require recruiting. It's never been a worse time to become a Herbalife distributor. Based on Herbalife's own data, the business opportunity has always been, on average, terrible for almost everyone.

Conversely, I'd argue that it has rarely been a better time to short Herbalife. Entering the short now allows you to create a trade much more profitable than Ackman's if the thesis plays out. Pershing Square (PSQ) is reported to breakeven around the low $30s, while new investors can breakeven at a much higher level. A major reason why investors shorting now are at a huge advantage to Ackman is that he had to pay for his research (in excess of $50 million has been reported), and investors have access to a substantial

This article was written by

Connor Davidson profile picture
I am an individual value investor focused on finding value and exploiting contrarian opportunities predominantly in the UK market. I carry out extensive research on unloved, complex and obscure companies to find what other investors have missed. Additionally I have a very long time horizon and look to find situations where a companies valuation diverges from its long term value due to short term factors. I am also partial to a good short in a bad company.

Disclosure: I am/we are short HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I currently hold a short position in Herbalife stock via derivatives whose value will increase substantially if the stock drops substantially. I have no connection whatsoever to Pershing Square or any other party known to hold a short position in the stock.

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