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Jonathan Poland
Jonathan Poland
Articles (364)  | Author's Website |

Risk/Reward With Herbalife

The rock star of all guru feuds is getting even more interesting

September 21, 2016 | About:

Herbalife (NYSE:HLF) is a global nutrition company.

It develops and sells meal replacement products across weight management, healthy meals and snacks, sports and fitness, energy and personal care products. It has over 5,000 SKUs globally sold through a network of director marketing representatives.

The most interesting aspect of this is the Super Bowl of guru investor feuds between Carl Icahn (Trades, Portfolio) and Bill Ackman (Trades, Portfolio).

During an eight-day stretch in August, in an attempt to bait Ackman to buy Herbalife, Icahn tried to sell out of the stock, but Jefferies Group was only able to get a $51.50 bid, $10 less than the market price at the time. He called off the deal and instead picked up more shares, pushing his total over 19.6 million shares, 21% of the shares outstanding and 4.9% of the Icahn portfolio.

Icahn is one of my favorite investors, not only because he’s a straight-shooting, unapologetic New Yorker, but because he’s generated better risk-adjusted returns than almost any other investor in the last 50 years.

It’s no secret that Icahn is also buying into Herbalife for ulterior motives, which involve sticking it to Ackman. In fact, he’s released multiple videos on the company – view them here.

Ackman has had a pretty horrible 18 months as a fund manager losing over 17% in a year the market was up marginally. Ackman has also been an outspoken short seller of the company’s stock; he still has more than $1 billion on the stock going south.

Interestingly enough, 52% of the shares are sold short so Ackman isn’t the only investor who is looking for the company to crumble. However, on the other side of the trade, Icahn said, “I am telling you that I’m not just playing games buying the stock. I’ve gone to the FTC to get accelerated treatment for the right to go to 50%” in Herbalife.

The best part for investors is that the stock is at roughly the same price it was a year ago, slightly higher than five years ago, and the company continues to produce solid financial results despite a slowdown in growth.

In July, it settled with the FTC, paying $200 million and agreeing to restructure some of its operations. Analysts now predict that by the end of 2017, the company could be earning $5 per share, which would put the forward price-earnings (P/E) at 12x.

If it was purely up to future growth of the company, I don’t know if Herbalife could double its revenue to $9 billion, its earnings to $500 million or higher within a time frame that would produce better than market returns.

The company has enough cash ($936 million) to continue share buybacks, which could potentially drive the EPS number to $6 or $7 by 2020. At 20x that’s a solid return. Maybe that’s what Icahn see in Herbalife, or maybe the possibility that 52% of the shares are sold short by sellers that will need to cover as the company continues to produce earnings and shares rise. That pop could be really quick and heavy.

Only time will tell, but if you’re on the long side with Icahn, going up to 5% of your portfolio value would put you at the same weighting. I’m excited to see where the battle of the gurus ends – Herbalife at $120 or $30?

Disclosure: I have have no position in Herbalife.

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About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager, publisher and analyst who helped investors produce market-beating results for over 15 years.

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