Why Herbalife's Shares Got Crushed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of nutrition products specialist Herbalife (NYSE: HLF  ) weren't looking very healthy today as they fell as much as 26% in intraday trading.

So what: With an earnings-release title that read "Herbalife Ltd. Announces Record First Quarter 2012 and Raises 2012 Earnings Guidance" you wouldn't guess that it'd be such a rough day for Herbalife shareholders. To be sure, first-quarter earnings per share did manage to impress. The $0.88 that the company reported bested the $0.81 that analysts were looking for. Revenue growth of 21% was no joke either. And while the company did indeed raise its 2012 guidance -- to a level that's basically in line with analysts' expectations -- its second-quarter outlook was below what Wall Street was looking for.

Now what: But forget about all of that for a moment, because what really had investors shaking in their boots today was the fact that famed short-seller David Einhorn materialized on the Herbalife conference call and started asking management some very pointed questions. One specific area of inquiry was why the company had stopped breaking out its distributor groups -- something that it'd done prior to the recent annual filing. The market's assumption seems to be that if Einhorn is on the call asking those types of questions then he's either building a short case against the company, or else is already short.

Einhorn has a pretty darn good track record, so there's good reason for investors to be concerned. No investor, however, has a perfect batting average, so investors may want to revisit their assumptions and investment cases before blindly running just because David Einhorn is sniffing around the company.

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Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (11) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On May 01, 2012, at 7:19 PM, Medicalrecordman wrote:

    Very "pointed" questions ? You must be joking. We were all calling Einhorn's questions "elementary" long before the company used that very term AH's. Geez, Einhorn says "BOO !!" and everyone fled for the exits. Meanwhile, the company just stated they still have $428 million left of their $1 billion to buy back stock and they raised guidance significantly. If this doesn't bounce to $65 by Thursday, I'll truly be shocked.

  • Report this Comment On May 01, 2012, at 7:38 PM, TruffelPig wrote:

    He already won because people sold........how stupid the market can be.

  • Report this Comment On May 01, 2012, at 8:02 PM, InvestWhatWorks wrote:

    @ Medicalrecordman

    Pointed questions are just questions that are specific and directed at something or someone in particular. Pointed questions are, more or less, questions that don't dance around the topic at hand.

    You can have thoughtful pointed-questions or elementary pointed-questions. Saying someone asked "pointed questions" doesn't automatically mean they asked good questions.

  • Report this Comment On May 01, 2012, at 8:03 PM, ravens9111 wrote:

    Anyone who shorts HLF now will lose badly. Those that bought on the drop will be rewarded.

  • Report this Comment On May 01, 2012, at 8:31 PM, MichaelHamilton wrote:

    looks overpriced to me anyway

  • Report this Comment On May 01, 2012, at 9:18 PM, naughtyguy wrote:

    Look at a two year chart and you will see that this is a very small correction. A little bit of profit taking I would guess.

  • Report this Comment On May 01, 2012, at 9:36 PM, realmarble wrote:

    This is one of the truly great internationl growth companies with a business model that rivals all other comsumer discretionary stocks.

    Big mouths are what Mr Market just loves to hate but profits from.

    Buy Buy Buy...i did and love that i did.

  • Report this Comment On May 01, 2012, at 10:28 PM, jianyi wrote:

    I have read the transcript between Mr. Einhorn's questions and the answers from the management. The questions were really some basic questions. Something that I may ask. But in the end, who are consume the products really matters? The company's fundamental seems ok. I notes also that the legal issues

    Law Offices of Howard G. Smith announces that it is investigating potential claims against Herbalife Ltd. (“Herbalife” or the “Company”) (NYSE:HLF - News) concerning possible violations of federal securities laws. The investigation focuses on allegations that certain statements issued by the Company regarding Herbalife’s business, operations and financial condition were false and misleading.

    Anyone has comments?

  • Report this Comment On May 02, 2012, at 7:45 AM, Casual72 wrote:

    Anyone who sold Herbalife because of David Einhorn's questions is an idiot, straight up. I am not an owner of HLF (although I did buy a couple call options yesterday on this dip) and I am not a rep in the company. I'm just an investor who realizes HLF Shares should have been UP yesterday, not down.

    I did not read the transcript so I don't know about any allegations about "certain statements issued by the Company regarding Herbalife's business, operations and financial condition were false and misleading." We'll have to see how that plays out - but there's one thing that's difficult to hide and that's the balance sheet data. If you simply look at that, it looks healthy. And a balance sheet is harder to lie about that income statments because auditors simply tie out numbers to statements.

    Regardless, I guaranteed almost none of the mass idiots that blindly sold read that statement and sold for that reason. They sold like sheep when they heard about Einhorn asking some questions. Who knows, maybe he's looking to buy a stake in the Company and he's not shorting it. If he is shorting it, he should cover now because this puppy is going higher.

  • Report this Comment On May 02, 2012, at 2:52 PM, sputnik99 wrote:

    How has said that Einhorn has gone short? Couldn't it be, that he has simply create for his self a more attractive buying opportunity to go long? He's a smart guy.

  • Report this Comment On May 03, 2012, at 6:55 AM, Usishkin wrote:

    A word about , analysts, expectations, and stock values.

    The financial industry took over the economy, or at least the stock market.

    Imagine this - ESPN analysts expect the Lakers to win by 12 and Kobi to score 28. Kobi scores 30, but the Lakers win by only 8. If this was the stock market - Lakers are OUT OF THE PLAYOFF they MISSED ANALYSTS ESTIMATES.

    What do we have here? we have people which mostly have produce nothing in their lives (certainly didn't score in the NBA), GUESSING what Caterpillar will produce this Q. and there is an over-under mechanism which is totally based on these geeks GUESSES which determines the value of the company.

    NOT MARGINS, NOT GROWTH, NOT FORWARD STATEMENTS

    it's only how well the analysts guessed. Who are these guys, "analysts"? do they have positions? themselves, their wives, their friends, their dogs?

    And Caterpillar is DOWN !!!

    A couple of months ago some crook analyst said she will disclose "next week" news on QCOR, QCOR dropped by 10% on this criminal nonsense. I read a little bit about QCOR and loaded up QCOR, and lo and behold, a couple of months and 1 earnings later, and the stock is flying.

    DE is just another kid, who hasn't done anything in his life.

    Well, you say, he guessed before.

    As a statistician let me explain something to you. When you have 1000 analyst betting on a 10-90 situation 1 of them will hit 3 for 3 (on ave).

    During the last summer we saw on Bloomberg all the analysts who predicted correctly 2008-9, and made the Time magazine cover, telling us there is 100% chance double dip is upon us. 100% no less - 100% is MORE than the chances the Sun will rise tomorrow !!! I'm telling you this as a statistician.

    Oh well, they missed, oh well ten of thousands of investors lost a lot of money (sat on the sidelines through the Oct-Mar explosion because of these idiot analysts).

    These hedge funds guys and analysts are causing a lot of damage to a lot of amazing companies, and investors... just because they guessed wrong !!!

    If you judge earnings on fundamentals, growth, a good PEG, or a positive change in PEG => stock should rise, or vise-versa. That's cool. But a geeks guess?!!! are we out of our minds?

    A company moves from profit to loss, and the stock goes up because they lost less than the geek thought.

    What happened to us?

    Maybe it's time we all pull out all our money from these ignorants' funds, dry them out and send them home.

    Yes, MF are sort of analysts too... but, without them I wouldn't be in DDD, WPRT and some other wonderful ideas. Here it's not about expectations, it's about fundamentals with a itch for growth.

    Different and most welcome

    Sorry for the length...

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