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Ackman’s ‘Pyramid Scheme’ Claim Continues to Suck the Life out of Herbalife
Posted by: Dianne Tordillo (IP Logged)
Date: December 20, 2012 03:44PM

Herbalife (HLF)'s stock continues to plummet after news exploded yesterday about Pershing Square Capital Management hedge fund manager, Bill Ackman, calling the Herbalife business model a pyramid scheme. Ackman, an activist investor, has been short Herbalife for about seven months.

Yesterday, Herbalife was down as much as 15 percent after the announcement. Today, it is down 10 percent – and it continues to drop.

HLF data by GuruFocus.com

Herbalife chairman and CEO Michael Johnson immediately responded to Ackman’s pyramid scheme allegations, calling the claim “bogus.” Johnson also retorted, “This appears to be yet another attempt to illegally manipulate the market by a group of overzealous short-sellers.”

During today’s 9:30 a.m. gathering hosted by the Sohn Conference Foundation where Ackman served as one of the speakers, he expanded on details, further backing his pyramid scheme allegation, stating:

"Herbalife inflates the suggested retail price of its products and overstates retail sales… recruiting worth is substantially greater than the retail profit that they generate.”

After his conference presentation, Ackman met with CNBC and explained why he is short on Herbalife in the first place. He addressed Johnson’s insinuation that connected Ackman’s comments to some put options that are due to expire Friday, which Johnson claimed were “pegged by some kind of significant event.”

“I’m going to be very clear. We own no puts on Herbalife,” Ackman said to CNBC. “We’re short the stock only, and we’re not short any other company in the industry, just Herbalife. We shorted the stock, I would say, seven months ago, and we’ve had our position since then although we built it up over time.”

Ackman even admitted a plan of donating to charity the money made from shorting the stock.

“It’s not a happy thing,” he said. “You’ve had millions of low income people around the world who’ve gotten their hopes up that there’s an opportunity for them to become millionaires or hundred-thousand-aires, or some number like that, and they were duped.”

According to PyramidSchemeAlert.org, a non-profit private consumer organization that confronts businesses that have been believed to perpetrate the scheme, pyramid schemes are multi-level marketing companies that place emphasis on sales based off of the distributors of the product rather than profits from actual retail sales.

Whether Herbalife is, in fact, running a pyramid scheme is out of the question, according to Herbalife chairman and CEO, Michael Johnson. In an interview with CNBC, Johnson passionately argues:

“We don’t pay for recruiting. We’ve been in business 32 years. We just announced a $100 million dollar facility in North Carolina employing over 500 people with the governor of North Carolina…this is a legitimate company.”

GuruFocus Insider Activity shows that Johnson sold some of the company’s shares in March, and again in May.




With a market cap of $4.63 billion, Herbalife is a global nutrition company that sells weight loss and personal care products through a network of independent distributors.

In its third quarter financial results, Herbalife reported net sales of $1 billion, a 14 percent increase compared to the same time last year. The company also reported a 9 percent year-over-year increase in net income.

The company’s revenue growth rate in the past twelve months is 21.8 percent, according to its 10-Year Financials. Its EBITDA growth in the same time frame is 21.1 percent and its free cash flow growth is 2.1.

It has a P/E (ttm) ratio 9.2, a P/B ratio of 11 and a P/S ratio of 1.5. Its dividend yield is 2.6 percent, and its dividend payout ratio is 0.28.

Year to date, Herbalife’s market value, especially recently, has gone down by a growing 27.73 percent

GuruFocus ranks the company 9 in Financial Strength and 5 in Profitability and Growth.

Gurus who have long positions in Herbalife include Ken Heebner, Joel Greenblatt and Jim Simons (HLF: Holding History).

To view his latest trades, go to Bill Ackman’s Stock Picks. Also view his undervalued stocks, high-yield companies and top growth stocks.







Guru Discussed: Bill Ackman: Current Portfolio, Stock Picks
Stocks Discussed: HLF,
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