Ackman’s initial announcement of his $1 billion short against Herbalife in April 2012 immediately sunk the company’s stock by more than a third. In December 2012, it plunged again by about 38%. His victory was short-lived, however, when in the next year Herbalife’s soared to all-time highs.
The stock’s price has flagged by almost 18% year to date as the saga drags on with no end in sight, but as Ackman scores several points. His case advanced in March, when the Federal Trade Commission (FTC) announced it would investigate the company. The company faced two more hits after the first quarter’s end in April including a shareholder class action lawsuit accusing the company of being a pyramid scheme, and an investigation by the FBI.
Several well-known investors still bet against Ackman’s strategy panning out or possibly saw the company’s vindication in sight, and took long positions in the first quarter. Kyle Bass (Trades, Portfolio) of Hayman Capital Management bet the largest portion of his assets – 1.7% -- on the company, purchasing 318,000 shares. Paul Tudor Jones (Trades, Portfolio) and John Burbank (Trades, Portfolio) took smaller positions, buying 15,022 and 4,036 shares, respectively.
Bass’ first-quarter position was a revisit. In the fourth quarter 2013, he had sold out of 436,371 shares which he purchased in the previous quarter. He commented on Feb. 1 to CNBC that although he said he had not yet studied the company, he felt Loeb’s endorsement was a strong positive signal:
“Dan Loeb’s one of the most talented investors in the world, he’s a good friend, I would never bet against Dan Loeb. So I think Ackman’s got a tough row to hoe from here.”
Loeb had taken a position sized at 3.1 million shares in Herbalife directly after Ackman’s first presentation against the company in fourth quarter 2012. He sold out in the first quarter of 2013. In his letter to clients, Loeb called the company “a classic ‘compounder’ – a well-managed company that sustains consistent top-line growth, has a leading market position and steadily increases margins, earnings per share and free cash flow while demonstrating shareholder-friendly behavior,” and labeled Ackman’s thesis that the FTC would suddenly shut it down “preposterous.”
Herbalife's 10-year revenue and earnings history:
Other investors enlarged their existing holdings. Richard Perry (Trades, Portfolio), of Perry Capital, increased his position by 60% to 4.66% of the company’s outstanding shares, or a total of 4.8 million. He has held the company since third quarter 2013.
George Soros (Trades, Portfolio) also upsized his holding, by 52.6% to 4.76% of the company, or 4,901,337 shares. He has held Herbalife shares since second quarter 2013.
Perhaps Ackman’s biggest opponent, Carl Icahn (Trades, Portfolio), added 33,515 shares of the company in the first quarter, making it his holding an even 17 million. He started investing in Herbalife in the first quarter 2013 and now has a 16.8% interest.
Icahn has been active at Herbalife, agreeing with the company on March 24 to nominate three of his candidates to its board of directors, in addition to the two Icahn Enterprises (NASDAQ:IEP) representatives already on the board, which has a total of 13 members.
"We remain resolute in our commitment to the long term success of Herbalife," Icahn said in a statement. "We continue to have confidence in its board and management team, and believe in the company's great potential.”
Other followed financial gurus decided to exit their Herbalife positions in the first quarter, most of which had small interest already. Chuck Royce (Trades, Portfolio) eliminated 1,700 shares, Joel Greenblatt (Trades, Portfolio) sold 39,565, Steven Cohen (Trades, Portfolio) sold 12,700 and Pioneer Investments (Trades, Portfolio) left 65,112.
Others with larger positions made moderate to marginal reductions. Louis Moore Bacon (Trades, Portfolio) led with a 55.7% cut to 17,500 shares, Jeremy Grantham (Trades, Portfolio) decreased by 17.3% to retain 646,878 shares, MS Global Franchise Fund (Trades, Portfolio) sold down by 15.6% to 127,111 shares and Jim Simons (Trades, Portfolio) chiseled 13.2% to retain 638,600 shares.
Herbalife’s strong first quarter results and shareholder-friendly actions helped boost the stock price since they were released April 28. The company reported a 12% year-over-year sales increase to $1.3 billion, on 9% volume growth. Adjusted net income increased to $151 million, or $1.50 per diluted share, from $137.4 million, or $1.27 per diluted share a year previously. GAAP net income decreased to $74.6 million, compared to $118.9 million, primarily due to a foreign exchange loss for Venezuela.
The company’s board also decided to eliminate its dividend in favor of repurchasing additional shares. It plans to repurchased $581 million of its common stock during the second quarter of 2014, comprised of $315 million through a trading plan, $50 million included in previous guidance and $216 that would have been spent on cash dividends over the upcoming eight quarters.
Herbalife has $1.26 billion cash on its balance sheet as of the close of the first quarter. As of Friday it has a P/E ratio of 14.2, P/B ratio of 155.4 and P/S ratio of 1.39.
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