The battle between the two titans over the future of Herbalife, can best be described as a high stakes poker game. Everyone is wondering who will win out in the end, or maybe it just ends in a draw. In this article I am going to try and size up the competition and see if I should side with Icahn and buy the dips in Herbalife, or if I side with Ackman and short the rallies. Maybe the best answer is to do both. I know that I am bullish prices of 35 and below since the low 29s were rejected on Monday, February 4th. I am also bearish when prices hit towards 45, as we started the December selloff from 46, we topped out on January 16th at 47.16 after hitting the 24.24 low, and on Friday, February 15th, we hit 44.93 near the opening to close near the lows of the day in the high 38s. During the pre-session on Friday we opened near 49.35, but then fell the rest of the day. The price action basically says to buy under 35 and sell 45 and above.
But it is no fun if we don't all pick sides in the battle and see if our guy wins. Although I don't happen to like Carl Icahn personally, I feel he has a stronger poker hand and I have joined the side of the bulls. Bill Ackman I feel is in a more precarious position and if there is a loser, odds strongly favor him as the loser. I will now explain my reasoning.
First of all, Carl Icahn is playing with his own money. Bill Ackman is playing with the money of his investors. This gives Icahn a huge advantage that cannot be over emphasized. It is the game changer. If Bill Ackman makes a mistake and ends up losing, he can be sued by his investors. He has a fiduciary responsibility to them. If things get dicey he will have a lot of pressure from these investors and lawsuit threats that Carl Icahn does not have. Carl has more money and it is his own money, so he has the most staying power. If Carl goes "all in", even if it is a bluff, it will be hard for Ackman to call, even if he is pretty sure it is a bluff. If Carl loses, he will still have enough resources to play another day. If Ackman loses this battle, he is probably finished for good.
Another problem I see is that Ackman came out first, which means he is the close man to the dealer. He went first and all poker players know that early position is not as good as late position that Carl Icahn has. Also, Ackman came out so publicly, he has done the ultimate poker sin; he has shown his cards. He told everyone that he is all in and will not stop until HLF trades at zero. One never reveals so much. No wonder other funds have come in and opposed Ackman. Such tactics are worse than foolhardy. Pete Najarian on CNBC said as much when he stated Ackman made a rookie mistake when he failed to take profits when the stock fell to 24.24. Now Ackman has an uphill battle because he is playing defense. Short selling works when you hit early, hit hard, and harder, and keep the pressure up. You never want to let up or get on the defensive because at that point it is usually more prudent to get out. From what I have seen so far, I am convinced that Carl is a much better poker player than Bill. He is a brawler, and he likes a good rumble. I cannot see Carl folding his hand as he is the stronger player with a stronger hand. The person who is going long and can do the short squeeze usually has an advantage over the short seller. Also the rewards for the short seller are limited and get smaller and smaller as the price drops, while for the guy going long, the profit potential is limitless. Well, I am sure that Carl is a true trader at heart and he is probably playing the swings, adding more shares on weakness and taking profits on strength. I would not be surprised if much of the selloff on Friday was due to him wanting to cash in a bit of his gains. Carl also can threaten to take the company private, which means he has an ace in the hole to play. If he can pull it off, it is game over for Ackman. The stock will be tendered for 60 to 75 dollars if that occurs and Carl will have pulled off the coup.
Many say Carl Icahn is just bluffing. He will never bid up for this turkey of a company and take it private. Who knows. It is still a viable threat to Ackman's short position. Also, the government can come in and do an investigation, and declare this company a Ponzi scheme and Icahn loses big. But is that really going to happen? Will Herbalife ever be brought to its knees and trade at zero? I believe there is zero chance that HLF every trades at zero. I heard Prepaid Legal was running what was indeed a Ponzi scheme but the government just fined them and let them reorganize, and the stock price doubled. If the government did declare HLF a Ponzi scheme, after paying a big fine and changing its methods a bit, Herbalife stock would surely get a big relief rally, and the mother of all short squeezes and it would probably double if not triple. Also, the government is very careful when if goes against big money and big lawyers. Celebrity justice is much different than regular justice. Carl Icahn is a celebrity investor and being a billionaire he gets celebrity justice treatment. It would take years for the government to declare HLF a Ponzi scheme. Ackman does not have years. Time works against a short seller. Icahn can wait Ackman out. Also, Carl has talked to the company and the company knows Carl is their savior. Herbalife has discussed things with Carl they would never discuss with Ackman. Carl has a better picture of what makes Herbalife tick than Ackman ever could. I am sure HLF has disclosed past dealings related to the Ponzi scheme issue and Carl has concluded it is a non-issue, at least in the short run.
And speaking of lawyers, if the government does not declare Herbalife a Ponzi scheme, Ackman is in big trouble. He can be sued for slander by the company and all the Herbalife investors. HLF investors inclue a lot of big institutions. If what Ackman has done is legal, then the law needs to be changed to make it illegal. His actions wreak of stock manipulation. If the government ever declares a neutral stance, coming out to say they are not going to investigate, that would be a signal for attorneys to start the lawsuits against Ackman. Again, I would not want to be in Bill's position. He thinks the government will save him. He better be right. Anything short or a Ponzi scheme declaration and Ackman is in serious trouble.
From this discussion, one can see how everything has to work out perfectly for Bill Ackman to win. While Carl Icahn can win just by making a nice trade and moving on. Bill Ackman is mixing religion with investing by going on a crusade against evil Herbalife. That religious fervor can cloud his judgment and make him less than objective. Carl Icahn is totally committed to just making money. I don't condone Icahn's derogatory comments when he made light of Ackman's Jewish heritage. Carl curses too, and is more than a bit rough on the edges. Bill is definitely more likable, and more socially sophisticated. But judging the poker hands that both men hold, and their skills at playing, I am all in with Carl Icahn.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am short out of the money HLF puts that expire on February 22nd.