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How Investors Could Profit From the Pershing Square Versus Herbalife Duel

July 23, 2014 | About:

Disclosure: I neither long nor short Herbalife. I also do not have any financial interest in the company.

What is the Recent Story On Herbalife

As the epic battle between Pershing Squares - a multibillion dollars hedge fund leading by world-renowned investor William Ackman - versus Herbalife (HLF) continues, prudent investors could profit by building share at bargain prices.

The highly regarded fund manager, Bill Ackman (Trades, Portfolio), shorted more than $1 billion on Herbalife since last year. Mr. Ackman's rival, Carl Icahn, is also another billionaire investor activist who heavily invested in Herbalife via his namesake company, Icahn Enterprises LP (NYSE: IEP). The two men fought battles of attrition reminiscence of the rivalry duels between basketball superstars Jeremy Lin versus Kobe Bryant in the prior years.

How is the Stock Trading Recently

During Tuesday July 22nd, 2014 TV appearance, the Pershing Square's Principal presented his short thesis against Herbalife's CFO Johnson. It appeared the victory went toward Herbalife as Mr. Bill Ackman (Trades, Portfolio) did not exhibit his usual flares. Consequently, Mr. Market was quick to pick up the Pershing Square's Principal's lack of confidence, thus, sent Herbalife shares up by more than 25 percent and translated into roughly $250 million in "paper lost" for the short Titan.

In the same trading session, Herbalife volume surged to 27.5 million shares, which traded at premium ranging from $52.50 to $68.23. The stock's 52 weeks trading ranged from $49.35 to $83.51, with 1.5 million average daily volume. In addition, Herbalife has reached a market cap of $6.65 billion. There are 98 million shares outstanding and 108 percent institutional ownership.

Source: Finviz

Tell Me More About Herbalife

Herbalife (HLF) is a company ( based in the Grand Cayman Island) selling nutritional, sport, personal care, as well as, weight management products. Herbalife's business fundamentals were, indeed, supported by the increasing prevalence of obesity and diabetes around the world. As the prevalence for obesity and diabetes are increasing, demands correspondingly increase for products that seeking to improve personal health, nutrition, as well as, to promote weight loss and exercise.

Accordingly, the insulin market stood at $29 billion. It is growing at the rate of 12.4 percent, annually, and projected to reach $45 billion by 2020. Insulin is used to treat diabetes mellitus, which is a medical condition caused by an impaired ability to regular blood sugar. Additionally, diabetes is highly correlated with obesity. When a patient become increasingly obese, their body decreases its ability to regulate blood sugar, eventually, leading to a state of insulin resistance.

By reducing weight and improving nutritional status, Herbalife's products procured increasing revenues for the company. Nonetheless, Herbalife only tapped the tip of the icebergs so-to-speak. The vast territories in this market remained to be conquered.

What About the Fundamentals

Fundamentally, Herbalife is indeed vibrant regarding all financial metrics. The company net earnings have been on an increasing trend. For instance, Herbalife posted $483 million in net earnings for the trailing twelve months (TTM). For the same period, earnings per share (EPS) were $4.58 PS, which was +184 percent higher versus $1.61 PS 5 years ago. The annual earnings growth rates were calculated to be 37 percent, by dividing +184 percent by 5 years. Given that the stock has a PE of 12 versus an average annual earnings growth of 36 percent, Herbalife is a Warren Buffett (Trades, Portfolio) style deep bargain.

Source: Retail Investor 360

Source: Morning Star

So What is the Bottom Line for Investors

Despite ongoing "clashes of the Titans", investors should neither take side nor focus on the details. In contrast, it's best to be patient, opportunistic, and to perform independent research. My research revealed that Herbal life valuations were highly attractive, given that company is generating 36 percent averaged annual earnings growth yet its stocks are on sale at only 12 time its earnings. In currrent bull's market, Herbalfie stood out as a rare investment opportunity, perhaps, due to the dark clouds of uncertainty, regarding its business model of multi-level marketing, which is still up to the jury to decide. After lengthy investigations by various authorities, no evidence found showing Herbalife's mischievous doing. Similarly, Nu Skin Enterprises (NYSE:NUS) is another company in the same industry, being shorted by a highly reputable firm, Citron Research, only to experienced investigations by the Chinese authority and then vindicated any potential wrong doings.

In addition, I must disclose that the technical analysis chart above rather served entertainment purpose. Nonetheless, it is interesting the chart was weaved full of math equations obeying laws of both geometry and calculus. For instance, the resistance point based on Fibonacci lines indeed correlated with the two Pythagoras Triangles. While I do not debate the merits of charts reading as I witnessed great technical analysts, I must admit chart analysis is indeed beyond my skills. Needless to say, I do hope readers find my chart useful as a work of art and arithmetic.

The bottom line for investors is that Herbalife is indeed a highly profitable business supporting by solid fundamentals. If the company could weather this storm, Mr. Market would change his mood drastically and reward loyal shareholders with significant returns. Needless to say, I could not guarantee 100 percent accuracy in my research. My research served best as starting point to help readers perform their own diligence. As a final reminder, investors should be patient, as well as, having conviction needed to achieve outstanding returns. Even if investors could improve profits by 1 percent, their investments will add up substantially when compounded over many years.

"Integrity, Ingenuity, Essence, and Essentially All Else Follows"

About the author:

hvt2107
I have the background as an MD and a researcher. I am currently the Chief Medical Analyst for Retail Investor 360 and I host my internet show 360 Biotech With Doctor Tran. I am also a contributing author for Seeking Alpha.

Visit hvt2107's Website


Rating: 2.0/5 (3 votes)

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Comments

SeaBud
SeaBud premium member - 3 months ago

All of the above begs the question - is HLF a ponzi scheme. If sales of HLF product to resellers is repeatable and profitable, then the above is accurate. If HLF sales are based on constantly bringing in new resellers to buy product that is to be resold, this is a ponzi scheme. In this case, whether HLF is "fairly valued" requires much more than looking at numbers.

hvt2107
Hvt2107 - 3 months ago

@SeaBud The bottom line for Herbalife all boils down whether it's operating a ponzi scheme. As of right now, that is still up to the jury. It's interesting however that Nu Skin faced similar situation and it was vindicated. It was also tough for me to write this article as I took it down once on my site. I studied Carl Icahn (Trades, Portfolio) for more than a decade and I have much respect for Mr. Icahn. However, I also highly respect Bill Ackman (Trades, Portfolio) as I know how it feels to be an underdog. I believed Carl Icahn has a critical weaknenss and it'd be more effective for Mr. Ackman to focus elsewhere. I also like Mr. Ackman as he took the punches when another investment Gurus, George Soros, left him & sided with Mr. Icahn. Thanks for the inputs!

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