On Thursday, July 31, the CFO, COO, and President of Herbalife bought a total of $1.7 million worth of their company’s stock to affirm their confidence in its business model. The purchases were detected on the Insiders page of GuruFocus.
I have been paying close attention to Herbalife since Bill Ackman (Trades, Portfolio)’s presentation July 22 accusing the company of running a pyramid scheme. I have been watching for trades made by the investing gurus we follow and company insiders. So far the three insider buys have been the only activity from the gurus and insiders. Both can be followed through GuruFocus (HLF: Guru Trades, HLF: Insider). It is a good sign for the company when insiders are buying. They typically sell for many reasons, and it does not necessarily mean that they have negative views on the company. When insiders buy, it is usually for one reason. They think the stock is going higher.
Bill Ackman (Trades, Portfolio) is negative on the stock and reportedly has a billion dollar short position against it through put options. Carl Icahn (Trades, Portfolio) has the largest holding in the company with 17 million shares. George Soros (Trades, Portfolio) is next in line with 4.9 million shares. Neither Icahn nor Soros have reportedly made any changes to their Herbalife positions.
The stock has had erratic movement since the announcement of Ackman’s presentation. The stock bounced back up while Ackman was speaking and since retreated after second quarter earnings were announced on July 28. On a reported basis, EPS was down 2.2 percent per share. After adjustments, EPS actually increased 9.9 percent. The EPS growth rate was much slower than its 31.5 percent annual average over the past five years. Sales volumes have slowed in North America (-1%) and South & Central America (-7%), but have strong growth in China (+38%) and Europe, Middle East, and Africa (+22%). Full year EPS guidance was given as $6.17 to $6.32. It is now trading at $50.59, giving the stock a P/E of 8.10 based on full year guidance. According to Benjamin Graham, a no growth stock should have a P/E of 8.5. Therefore, Herbalife is trading as a no growth stock. According to the GuruFocus DCF Calculator, Herbalife’s fair value is $72.43 based on a 10 percent growth rate.