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HLF: Matt Stewart's Track Record And My Answer To Another Readers Question About Valuation

|Includes: Herbalife Ltd. (HLF)

I hope it is not viewed as an inappropriate personal attack when one simply reports track record facts. So, here goes...

I read Matt Stewart's most recent HLF article, "Ramey Rebuttal: Herbalife Is A Culprit Just Like Vemma". It contained the usual stuff: Vemma is a nail in the HLF coffin, everyone should sell now while they still have a chance, anyone who owns the stock is (pick your own derogatory adjective), professional sell side analysts don't know what they are doing, etc.

Separately, a little while later I happened to be searching for something not at all related to Matt's track record when I came across this old article he published about 9 months ago...

https://seekingalpha.com/article/2647525-barclays-meredith-adler-sell-side-rebuttal-4_7-billion-reasons-to-remain-short

I almost never comment on short-term market action.

But, it is now 9 months after Matt published this article. I think 9 months is a reasonable period to assess success of price recommendations.

The HLF price at the time was about $42. Matt strongly urged all bulls, and especially Stiritz and Icahn, to liquidate their positions as soon as possible (he'd made that recommendation many times prior to this article). As defined by the bullet points one of the main points of the article is that Stiritz and Icahn have huge mark-to-market losses and the assumption that Ackman has gains. Another focus of the article was that Barclay's analyst Meredith Adler was dead wrong in her recommendation to buy HLF.

Nine months later...

I don't know any of the players' actual cost basis in their HLF position. As far as I know both Stiritz and Icahn and Ackman still have their positions. I could be wrong on that.

Assuming all major players have more or less the same position today they had 9 months ago... Since Matt's article, Icahn and Stiritz have a more or less 30% increase in the value of their positions. I believe their positions are more or less straight stock positions without much leverage. I can't tell how much Ackman has lost in his HLF value, but I assume his losses are more than 30% since we know that his HLF position is heavily leveraged.

And, we know via his letter to shareholders, Ackman's portfolio declined by 10% in the last brief period, wiping out all his gains for the year. We also know from Ackman's letter that that HLF all by itself, while only more or less 5% of the overall portfolio, accounted for 3.7% of that overall 10% loss, or roughly 35% of the total. Said another way, Ackman has a 10% loss, 35% of which is accounted for by only 5% of his portfolio.

So, here is a report on Matt's track record...

1. At least over the past 9 months, Matt's stock advice has been dead wrong.

2. Over the same time frame, Meredith Adler has been right on the direction, but her price target is still a long way away.

Here are what I consider to be appropriate caveats to what I just said...

1. None of the above is relevant to Matt or Adler's (or anyone's for that matter) future predictions. It only measures a 9-month historical period.

2. Based on what I can remember, Matt has been a perma-bear since the beginning of the controversy, more or less around January 2013. I don't believe he's written anything at all that is in the least bit positive about any aspect of the entire controversy, although I could be wrong on that. Given the timing, I'd guess Matt's bearish position began more or less in the low $30 range. That compares with a current price more or less in the mid $50s.

3. Since the controversy began, the stock had a huge increase, followed by a huge decrease. I don't believe any of the Bears or any of the Bulls on this board changed their beliefs or positions in the stock during that time. So, whether or not a particular Bear or Bull has done well certainly depends on when he/she bought or shorted his/her position. I know Matt hasn't changed his negative regulatory or fundamental outlook, and based on his disclosures on his frequent articles I don't believe he's changed his short position either. That would suggest he has a significant loss, but I don't know that for certain and he is certainly under no obligation at all to disclose his trading, except when he publishes articles.

4. No one can predict the future, certainly not me. We all just make our bets based on the evidence, the issues and the perspectives on the issues we think are most relevant. And any of us can be wrong on any of that, including our beliefs about which issues are most important and the interpretation of the evidence as it applies to the stock price. That goes for all of us, including the pros. I know that intensely and personally, as in my younger life that was my profession for more or less all my professional life. Of course, the pros do it better. As a group they are smarter and way more focused on companies, stocks and markets than any group of individual non-pros.

5. An interesting statistic based on many studies is that the very best portfolio managers in the world are right on only about 55% or less of their bets. And, of course the other side of that statistic is that the very best are wrong 45% of the time. That's what makes Ackman, Icahn and Stiritz performance records so extraordinary and makes this particular stock so interesting as they are on opposite sides!

6. Historically, individual investors are not nearly as good as the pros. On average, we (and I include myself in this as I haven't done this professionally in some time) are wrong more than half the time on average.

7. The Bears or the Bulls can turn out to be right long term. We all believe the key issues are regulation and fundamentals. The Bears win if the regulators do something drastic to HLF and/or the company's fundamentals deteriorate significantly. The Bulls win if the fundamentals get much better on the upside and we never hear from any of the regulators (they are totally allowed to drop investigations or keep them open with no ongoing action without ever announcing it). We all believe those are the key issues in the stock price. BUT... it's in the realm of possibility that those will NOT be the key drivers of the stock. Maybe out of nowhere a huge company decides to buy HLF at a premium. Or maybe Stiritz and or Icahn announce they've sold their stock or HLF's Ms. Jones Harbor resigns unexpectedly. Black Swan events happen. Who knows?

As a whimsical aside… Ackman has just made a $5.5 billion highly leveraged investment for a 7.5% stake in snack food giant Mondelez International. According to published reports, he wants to re-consolidate that industry and get someone to buy Mondelez at a premium. Wouldn't it be poetic justice if Mondelez decided on a poison pill defense by buying HLF! Ackman has only 7.5% and might not be able to stop it! As identified, it's just a whim!

8. So, even though Matt's track record to date is unimpressive, he may turn out to be 100% right going forward. And long term is what matters.

Personally, I've been more or less a perma-bull since the controversy began in December 2012. Because I found the controversy so interesting, for fun, I tried to emulate what I did professionally in my past life; I did intensive research and decided to come down on the long side. It could have been on the short side if that's what my research suggested, as I am ambivalent about being long or short. Since then a huge amount of research, much (but not nearly all of which comes from this board) has gotten more deeply into the situation than I could have imagined in the beginning. I've paid close attention to all of it and and I'm still on the long side, maybe much to the disbelief of many on the board. I now have a very large position (NASDAQ:LONG) in the stock - it's one of the largest individual positions I've ever had. Fortunately, as any professional portfolio manager would do, despite its size I'm sufficiently diversified that even if HLF stock goes down a lot it won't change my lifestyle, although it will hurt my ego!

So, hopefully readers will find all of the above useful, balanced and interesting. I think nearly all of what I've written is simply fact and the opinion info is clearly indicated and does not attack any individual.

No flames please. Thank you.

REPLY FROM ONE READER

HLF Friend 1

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THANKS Old Analyst you Inspire us.... Do you have a target Price? and a Valuation Model

1 Sep, 01:47 PMReply! Report AbuseLike0

MY REPLY TO THAT

Old Analyst

, contributor

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I never have a target price. Personally, I think they are stupid. Prices at any particular time are dependent on market levels and valuations. For any particular stock, P/E ratios are never absolute, but just relative to the market. So, to me at least, I think price targets are irrelevant because there is an underlying assumption about the market that is never mentioned, and target prices are simply never independent of market action. There are two old aphorisms that describe what I mean. First, "When they raid the house, they take all the girls" which, in case it isn't obvious, means when you are in a bear market everything goes down. The second is, "Don't confuse wisdom with a bull market". That should be obvious.

In the case of HLF, my pricing model is so simple some could think I'm not a serious analyst.

HLF, IMO, falls into a category that we used to call "special situations" and is currently called "event driven". What that means is that the main stock price drivers are more of less market-independent, i.e. will have large effect mostly independent of market levels. Although raiding the house and bull markets are always relevant, they are much, much less so in these stocks. Think "binary" biotech stocks: if their new drug gets through Phase III (or even if it gets close) the stock soars and if it doesn't the stock craters.

HLF has earnings that are high enough that if the FTC doesn't do anything or comes out with a wrist slap the stock will surge. If FTC action is severe the stock will crater. In the meantime, market action and fundamentals will have a little bit of impact on the price. If the FTC action is non-existent or mild, then I'll pay attention to valuation, which, as always, will be based on relative (not absolute) value relative to market and other stocks in its sector. My pure guess is that if the positive regulatory resolution comes to pass, the stock will reach or exceed its historic highs. If the opposite regulatory situation develops, the stock will crater.

In that sense, I believe the stock is much more like a binary biotech stock than a normal stock. In other words, it is a very high risk/reward situation. IMO, most retail investors should steer clear, on either side, of those situations. Unless, of course, those situation fit into an overall portfolio that is sufficiently balanced to withstand the negative result (stock up or down, depending on your current position) if your bet is wrong. In other words, I believe that in these kinds of situations, investors ought to be focused on the risk involved in their positions. If their bet is on the right side of the trade, the reward will take care of itself.

Does that answer your question on price target and valuation model?

Disclosure: I am/we are long HLF.