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Herbalife Shorts Shorted More Shares To Stop Upward Share Price Momentum

Aug. 29, 2012 11:53 AM ETHLF3 Comments
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Long/Short Equity

Seeking Alpha Analyst Since 2012

I am President of Sporting Advantage Inc. which markets a revolutionary basketball product I invented, now called the SKLZ RAPID FIRE basketball return system, and owner of Hudson and Affiliates which markets cost reduction services of my affiliates to medium size organizations with a hundred to several thousand employees. I passed CPA exam in May 1977 and practiced as a CPA for 10+ years. I have 40+ years experience as an entrepreneur, inventor, investor and published writer.

I couldn't wait for Herbalife's (HLF) 2nd quarter financial information to come out believing that it would be very good. After David Einhorn's continued his silence and with little other support for the short case, I thought the reporting of a good 2nd quarter would send Herbalife's shares skyrocketing.

Herbalife did report a great 2nd quarter as per this press release after the stock market closed on July 30, 2012 which included the below information -.

"Herbalife Ltd. Announces Record Second Quarter 2012 and Raises 2012 Earnings Guidance"

· Second quarter volume points of 1.2 billion increased 23 percent with increases in each of its six regions compared to the prior year period.

· Second quarter EPS of $1.10 increased 25 percent compared to the prior year period EPS.

· Raising FY'12 EPS guidance to a range of $3.88 to $3.98.

· Board of directors approved a $0.30 per share quarterly dividend.

· Board of directors approved a new $1 billion share repurchase authorization.

· Company announces a $500 million increase in its credit facility.

I was elated with what a great quarter Herbalife had and the stock price took off from a low of $52.18 up to as high a $56.39 and then closed up at $54.89 on high volume. However as I watched on my trading platform over the next few days I was suspicious that the shorts were combating the enthusiasm created by the good 2nd quarter financial report with high volume shorting of the stock. I watched as I could see what I believed were high volume short sellers sell shares at opportune times which drove Herbalife's share price down. Over the next several days I watched the stock get pushed down to as low as $48.97 on August 10, 2012.

Click here to view Herbalife stock chart

The short interest report for all companies including Herbalife reports the total number of shares shorted at the middle and end of the month but usually takes up to 14 days to be posted. When I was finally able to view the short interest chart for Herbalife yesterday which included the 8/15/12 short totals, it was exactly as I thought it would be. The shorts had added 585,409 shares shorted for the period 8/1/12 through 8/15/12 and knocked down Herbalife's closing share price by $1.85-

Settlement Date Short Interest Closing Share price
8/15/2012 13,007,577 $53.05
7/31/2012 12,422,168 $54.89

Over the time period 8/1/2012 through 8/15/2012 shorts added 585,409 shorts to their positions and stopped Herbalife's share price from rising further after the enthusiasm over the record 2nd quarter earnings release ebbed. Not only did the stock, stop going up but Herbalife's share price was pushed down to as low as $48.97 on 8/10/12 before rising back up to it's 8/15/2012 closing price of $53.05.

I have to commend the shorts for apparently using their capabilities of shorting more shares of Herbalife and taking the steam out of the excitement over the terrific 2nd quarter financial report. Since 8/15/2012, Herbalife's daily share volume has dropped while it appears that shorts are still adding to their positions as they have pushed down Herbalife's share price to even below $50 (8/28/12) for part of the day.

There is no doubt that the shorts tactics have temporarily put a damper on some of the longs enthusiasm. These tactics have probably made a lot of the weak longs to sell off their shares. However I am sure that when the shorts can't push, and can't hold down Herbalife's share price any further, there is going to be a nice run up for those longs that have stayed the course. As shorts add to their positions to drive down and hold Herbalife's share price down, they actually add to their problems discussed in my prior article- "Herbalife Shorts' Problems Could Be Great Buying Opportunity For Longs".

On top of the problems discussed in my prior article, share trading volume has dramatically slowed down since 8/15/2012 to well under a million shares traded per day for all but one day. The other threats that continue to grow as time passes are that people seem to understand that Einhorn, who really was the person that started all of this, probably won't ever criticize Herbalife or for that matter won't even disclose whether he has a short or long position in HLF. Also, other than questions about immaterial events that have happened in the past, such as issues with Belgium, and a payment to Barry Minkow a known felon, shorts have not come forward with any evidence of material future problems for Herbalife such as an SEC or FTC investigation or even a slow down in business.

If an increase in short positions to over 13 million shares shorted along with share trading volume drying up isn't enough to concern the shorts, Herbalife has just started on another $1 BILLION share buyback plan. It will be interesting to see what happens when Herbalife reports an even better 3rd quarter financial report .

Disclosure: I am long HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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