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Hedge Fund Manager Bill Ackman Against Herbalife in a Two-Year Battle to Shut Down the Company

July 23, 2014 | About:
ovenerio

ovenerio

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In this article, let´s see what happened in the stock market with activist investor Bill Ackman (Trades, Portfolio), who will benefit from Herbalife Ltd. (HLF)’s falling share price.

About Herbalife

Herbalife is a global nutrition company that sells weight management, meals and snacks, sports and fitness, energy and targeted nutritionalproducts as well as personal care products. The company distributes and sells its products via a network of independent distributors, using thedirect selling channel.

Ackman´s Allegation

Ackman accused the company of operating an illegal scheme. Last year, the New York Times published an article in which it detailed Bill Ackman (Trades, Portfolio)'s strategy to put pressure to investigate Herbalife's distribution model which he calls a "pyramid scheme," where a company makes most of its money by recruiting distributors rather than selling products to real customers. He spent about $50 million to investigate Herbalife.

Ackman Investing Activity

Ackman has disclosed that his hedge fund, Pershing Square Capital Management, has sold short the company's shares. He sold short $1 billion of the firm’s shares before restructuring his investment with options. On Nov. 2013, he admitted on Bloomberg TV that Pershing Square's open short position in Herbalife was "$400 million to $500 million".

His Pershing Square investigated 240 of the company’s clubs in several countries. Specifically, Pershing accuses Herbalife of misleading distributors, misrepresenting revenues and selling a commodity product at inflated prices.

The Defense

Herbalife released results from an economic analysis that shows that it’s not a pyramid scheme. According to the research by Walter H. A. Vandaele, aneconomist at Navigant Economics LLC, 97% of the products are purchased for end-use consumption.

Stock Price Movement

Ackman said on Bloomberg Television yesterday that his firm will turn over the findings detailed today to regulators including the U.S. Federal Trade Commission and law enforcement which are investigating the allegations.

After he made television appearances yesterday, during which he drew comparisons between Herbalife and Enron Corp., the shares dropped 11%. Today, Mr. Ackman presented the findings of the investigation into the firm's Nutrition Clubs that Pershing Square sponsored. Unfortunately for him, there was little new information that could make the collapse of the company. Herbalife shares were up 11% as Ackman finishes presentation and soaring 25% to $67.77 on a very heavy trading, more than 14 times the average volume.

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Final Comment

Herbalife´s revenue growth has outpaced the industry average (12.37% vs 0.5%) and I expect this trend to continue. The stock price increased by almost 61% over the past year, which is really good for investors seeking capital appreciation. If you had invested $10.000 five years ago, today you could have $48.262, that is a 37% compound annual growth rate (CAGR) which I consider pretty good for investors.

Further, the company's current return on equity increased amazingly when compared to its ROE from the same quarter one year prior.

On the other side, as we have analyzed earlier, Ackman after taking a $ 1 billion short position in shares and pressured regulators to investigate, is betting on a price drop. At the moment there's almost nothing about whether Herbalife is indeed a pyramid scheme so I would recommend investors to consider adding the stock for their long-term portfolios.

Hedge fund gurus have also been active in the company in the first quarter of 2014. Gurus like Paul Tudor Jones (Trades, Portfolio), Kyle Bass (Trades, Portfolio), John Burbank (Trades, Portfolio), Richard Perry (Trades, Portfolio), George Soros (Trades, Portfolio) and Carl Icahn (Trades, Portfolio) have also invested in it.

Disclosure: Omar Venerio holds no position in any stocks mentioned.

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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