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HLF: The Long Of The Short

|Includes: Herbalife Ltd. (HLF)


I've heard a lot of people contend that the Herbalife trade is one to stay away from. I agree with this 100% outside of two conditions. One, you're a long that disagrees with Ackman entirely and sees real value in the stock or two; you're a short that has dotted every I and crossed every T. I don't see how one can justify the risk that the trade presents being semi-educated and forming their thesis solely through reading the headlines and cookie cutter articles that come across the wires.

At this stage in the game we've heard every argument from both sides so I want to go back and revisit several aspects of this saga from its onset. Although all points in this article have been presented in spots, I'm going to throw out all of the book values and cash flows of the stock and what a pyramid scheme is or isn't to strictly focus on a few key pieces to the puzzle that have come into place for me. I know this will be an incredibly tall order for longs but I ask that you find it in your hearts, however painful that may be, to answer the questions I pose acting as an impartial juror.

I'll start by saying that I've been short for most of the last year and outside of a few days it has been miserable. At this stage I constantly find myself asking if it's really worth my emotional and financial capital. The answer continues to be a resounding yes. I don't know how this will pan out and neither does anybody else but having put in the work and dissecting every angle I can accept going to the grave with a less than desirable outcome for my short.

Does Carl Ichan have a better understanding on HLF than Bill Ackman?

This is a very important question to consider because the initial CNBC interview drew the lines of the battle ground between longs and shorts. I believe history will prove this question paints a much bigger picture that we're lead to believe. I first watched this saga play out with everyone else in December 2012 on CNBC without knowing much about Bill Ackman. Personally I've always been a Carl Ichan guy. Outside of the fact he's a billionaire he's more like you and me. He comes across as everybody's kind of guy; witty, smart, well spoken, and a battle tested trader. Ackman on the other hand resembles almost none of those relatable qualities. He reeks of the stereotypical one percenter that most Americans resent and despise. He comes across as smug, arrogant, and unapproachable. However when I set aside my feelings about Ackman a foggy story started to become very clear. Almost as if a light came on in a very dark room filled with artifacts.

Several months came and went after the initial interview as I watched the stock swing wildly from afar. I never had an ounce of interest in taking a position either way until I decided to go back and watch that initial CNBC interview. A key argument for longs has been "Carl Ichan's taking a massive stake so clearly he's done his diligence." As I watched the interview for the third time it became very clear that this argument actually appeared quite the opposite. Bill Ackman is citing precise and fundamental reasons for why he is taking a short position while at the same time it's very hard to pin point Carl Ichan citing one legitimate reason for why he's going long other than to exact revenge and settle an old score by engineering a squeeze. If you don't believe me I strongly encourage you to re-watch. At one point in the interview Icahn not only refers to HLF asHaLF but states that "I wouldn't care if it was anyone other than Ackman" ( Possibly a reason it's been recently reported that the SEC is investigating for collusion). Ichan continues to sound restless as Ackman is presenting his case at which point Ichan then states "this could be the mother of all short squeezes" in a somewhat taunting tone. These few moments on the initial CNBC interview begin to tell a much bigger story upon closer inspection. Ironically enough the 'reckless Wall Street gambler', which HLF CEO Michael Johnson dubbed Ackman, actually appears to be Carl Ichan. Let's consider a couple of questions this simple interview begs. Is it be sensible to think that based on the above statements, Carl Ichan seemingly made up his mind in this moment before doing any homework on the company that he was going to round up his cronies for no other reason than to orchestrate a squeeze on Ackman (pay close attention and you can hear Ackman recognize this)? If not, then on what basis do you believe Carl Ichan has a better grasp on HLF than Bill Ackman? After all Ackman only put a 360 slide, three and a half hour presentation together that swept every crevice of the company. A presentation too by the way that, to the best of my knowledge, has not gotten any rebuttal from HLF. Don't confuse rebuttal with smear campaigns and resent either. Unless Carl Ichan is a master of reverse psychology and was dumbing down his knowledge on HLF I'm not sure being steadfastly long because Ichan is long seems responsible. Have you listened to Ichan talk about the company since? It seems he's confused more often than not as Ackman talks about HLF with the fluidness as if it's his own company. Is it possible Ichan told himself a lie so many times he started to believe it?

Presidents and CEOs giving "misstatements"?

Let's revisit HLF CEO Michael Johnson giving two different answers to the same question in the span of a couple of weeks about how the company generates sales. Initially Mr. Johnson states that 90% of company sales come outside of the distribution network. A couple of weeks later he appears stating his initial answer to the question was a "misstatement" and that that 90 percent figure is actually the figure for personal consumption (which seems like a tall tale in and of itself but who's keeping score). Mr. Johnson was "hyped up" during the initial interview apparently. I work at the CBOT. Trust me I've never met anyone here too hyped up, even for this culture, to confuse basic sales figures.

I suppose this could be viewed as unremarkable but then, come to find out, HLF President Des Walsh during an interview with David Einhorn states that 70% of sales are "sold to consumers or actually consumed by distributors for their own personal use" . Now how can it be that the CEO and President of a publicly held company are giving different answers to the same basic question? Shouldn't the CEO and President know the company they are running inside and out? At a minimum, shouldn't Mr. Walsh and Mr. Johnson be on the same page? Can you imagine Jack Welch, Warren Buffet, or other high powered corporate executive fumbling around with the basic question of where their company's sales stem from? Any CEO and President that give the same replies as Mr. Johnson and Mr. Walsh would be viewed as incompetent or as trying to hide something. Mr. Johnson and Mr. Walsh are probably not incompetent. They have driven this company to wild levels of success. Is it reasonable at this point to start wondering if maybe Michael Johnson is hiding something with his "misstatements"? What about Des Walsh? It's funny because Bill Ackman never seems to have this problem when talking about Herbalife. Maybe it's just me but it feels like Bill Ackman is reciting the alphabet when speaking about HLF while HLF's execs, sounding like clones of Rafael Palmairo and Mark McGwire, are trying to recite the alphabet backwards when talking about their empire.

Ackman's "unfounded and baseless attacks against HLF"

The questions continue to mount for logical thinkers. Recall that HLF paid Barry Minkow $300,000 to go away several years ago when he threatened to unleash a short thesis of his own on the company. Ask yourself this...why pay a guy, basically off the streets, to go away if what he is saying is unsubstantiated and your company has nothing to be exposed to? Longs contend "well he's a convicted felon". Why does it matter if he's a convicted felon? This has no bearing on the fact that he was compensated $300,000 to go quiet. What company pays that kind of hush-money if there's nothing to hide?

Nonetheless Bill Ackman picked up where Barry Minkow left off and has presented his case several times. During this period in which Ackman has presented, HLF has cited Ackman's thesis as "unfounded" and "ridiculous". Throughout this time HLF has failed to answer any important questions Ackman has addressed (2000 surveys sent to distributors with 350+ replies don't count).Why would it be that HLF hasn't responded to Ackman? Maybe it's because it's been thought that innocent parties rebutting makes them look guilty. I suppose that's a legit point of contention but then how can you explain HLF spending tens of millions of dollars on smear campaigns against Ackman? Wouldn't it be more cost effective to address Ackman's concerns and silence him that way? In addition how come HLF hasn't filed a libel suit for what they adamantly plead are "unfounded" and "baseless" attacks by Ackman? Is it irresponsible to conclude that Ackman has sheltered himself from such a suit because everything he has stated about HLF is factual? In addition why in the world would HLF corporate try and persuade Pershing Square investors to run for the hills and take their money out of the fund? Despite HLF and JC Penny going in Pershing Square's face the fund was up around ten percent in 2013. Is it out of line to think that HLF is perhaps diverting attention from the real matter by running smear campaigns on Ackman rather than attack his 'unfounded and baseless' thesis? Those are strong words from HLF. These 'baseless and unfounded' attacks should be easy to refute if there's so many holes in what Ackman is saying right? If I'm HLF and have nothing to hide Ackman's a hayseed and I carry on.

The global obesity epidemic and HLF's business expansion

I want to think about and review where HLF is expanding its glorious business opportunity. I understand the global obesity "epidemic" is a real (It's not typhoid fever). But is this something that only a seemingly high number of lower income individuals and minorities are fighting? It would appear so based on the demographics to where HLF is expanding. There's 30,000 nutrition clubs in Mexico? Expanding to the country Georgia, Ghana, and Cambodia? Do the countless clubs within a tight radius of Queens seem funny to anyone else? Why can't anyone I know in the heart of Chicago find HLF products? How come the only distributors I've found in the Chicago area seem to be located on the rough west and south sides of town? Surely one would think there must be distributors somewhere in these affluent parts of the city. Chicago, New York, Dallas, etc. are overflowing with young, health conscious individuals with expendable income. Herbalife's products are ideal for this demographic yet how can it be that the very demographic which is tailor made for HLF's expensive and cutting edge products mostly haven't heard of it? This should be a gold mine for their self-proclaimed cutting edge products to be retailed and personally consumed. Can I wonder that maybe HLF's main priority isn't selling actual products? Is it wrong that I'm starting to think that possibly HLF realizes nobody in these more highly educated and affluent areas will take their bait thus it's possible they're gunning for the lower hanging fruit? Based on these few examples (I assure you I could write a book with countless other examples) help me understand what I'm not understanding about this HLF culture.

The business has been around for over 30 years argument and Ackman's politicking

I can't believe how many times I've heard this argument. Ya. So was Donald Sterling. So was Bernie Madoff. So was Allen Stanford. So was Enron. Better yet ever watch American Greed? There's been about 100 episodes of fraudulent businesses being around for years and years before getting exposed. This argument carries the same weight as a feather. It's actually unbelievable that this is an argument considering how much publicity the media has given these frauds. I would think people wouldn't be so gullible or at a minimum be a little more skeptical. Especially with all of the red flags surrounding HLF as it is. Apparently nobody cares that 6 federal agencies are looking into HLF. Am I out of order thinking this point of being in business for 30 years seems vastly overstated?

At the end of the day the reality for HLF is that they've finally run into a guy that has the firepower and the intellects to stand toe to toe with HLFs politicking; regardless of whether you agree with his tactics. If he's going about it legally then the tactics are irrelevant. Another thing I find incredibly fascinating is that Ackman has barely mentioned HLFs decades and millions of dollars spent on politicking and lobbying. Perhaps that's because he has a mountain of other facts and evidence to do the talking for him. It is truly amazing to consider Ackmans politicking efforts and how they're portrayed as evil in the media. This is one of the only debates anyone seems to have for the guy. It's even more hilarious when HLF is orchestrating a virtual one dimensional attack that focuses almost solely on Ackman's politicking/lobbying. Especially when Ackmans dollars spent are micro fractions of HLF's dollars spent but again who's keeping score. Does it seem like these one dimensional diversion tactics for HLF is the only ammo they have to shift the focus off the core issue? If not, what seems like a more logical explanation to this approach?

Wrap it up

In the end does HLF look, smell, act, and function like a pyramid scheme? Probably. Is it reasonable to be slightly skeptical of HLF's accounting tricks and magical 21/21 consecutive earnings beats (you read Shane Dineens article? And longs will call him a moron). Probably. I suppose these aren't entirely conclusive to someone that walks around with blinders on but from a logical and common sense stand point what about some of the very simple questions and scenarios I've focused on doesn't raise red flags? At this stage I'm only lead to think that Bill Ackman is resented by Wall Street thus keeping a bid under the stock to squeeze him out. It's a really creepy envy that I sense these people have of Ackman. Get over it. He's smarter than all of us and it's not close. Try removing the emotion about how you feel about Bill Ackman and focus on the events that have transpired. It helped me and I think it can help others.

The only mistake Bill Ackman has made up to this point was when he patted himself on the back at the conclusion of his Sohn conference presentation; essentially declaring himself a winner right there on the spot. That single gesture invited a lot of big players to swing back. And I'm glad he did pat himself on the back because that helped thrust the stock in his face to $60, 70, and towards 80. The HLF trade just isn't interesting in that it offers almost no value to a short at the $30 level. At $60, 70, and 80 there's justifiable value.

Like I said If you've done the work and watched the full 3.5 hour Sohn Conference presentation, the China presentation (by the way WTF is hourly consulting pay), the initial CNBC interview, you've been able to set aside the personal emotion/feelings for Bill Ackman, and you're still long please help me understand. However don't give me HLFs new Gold Standard Guarantee, "Ichans in it", their cash flows are good, and they've been around for 30 years arguments. They're pathetic. HLF is playing a one man game of Jenga that's reaching a conclusion.

Continue ignoring the red flags. Maybe I'm wrong but I'll have no problem being wrong after looking at this from every angle. There won't be another common sense trade like this for a long long time so I'm going down swinging. HLF may not even sell off another dollar from these levels and rally to $100 and beyond but my hunch is that Bill Ackman is probably the new sheriff on Wall Street for a long time to come.

Disclosure: I am short HLF.