This Broken Stock Could Break Further

Stocks recovered from early losses; the Dow Jones Industrial Average (DJINDICES: ^DJI  ) and the S&P 500 (SNPINDEX: ^GSPC  ) gained 0.5% and 0.6% today, respectively.

The micro view
Tim-ber! After yesterday's 12% decline of Herbalife (NYSE: HLF  ) shares in anticipation of hedge fund manager Bill Ackman's "short" presentation, the stock fell almost 10% today. Relative to their 52-week week high achieved in April, the shares have lost more than half their value.

Without having spent a single minute analyzing the company or the stock, I would urge current Herbalife investors -- particularly those who consider themselves long-term ones -- to review their holding with an extremely skeptical attitude. Why? Two simple elements:

  • CEO Reaction: When he took to CNBC's airwaves on Wednesday, Herbalife CEO Michael Johnson immediately called for the SEC to investigate what he called "blatant market manipulation." That's a classic attempt at misdirection, which is characteristic of managers of scam companies in response to short-sellers. 

The truth, to quote legendary value investor Seth Klarman, "is that short-sellers do far better analysis than long buyers because they have to." Ackman, who manages Pershing Square Capital Management, is a superb fundamental analyst and investor -- he is smart and extremely thorough. If he says there's something wrong with a business, it's well worth listening to his reasoning.

  • CEO Pay: The Financial Times reports that Herbalife paid Mr. Johnson $89 million in total compensation last year, making him the highest-paid CEO in corporate America, according to GMI ratings. Let's put that number in context: It represents nearly 2% of Herbalife's $4.5 billion market value prior to Wednesday's decline. It would require a tremendous amount of convincing for me to believe that Mr. Johnson is worth that type of remuneration -- particularly if one considers the company's business model (network marketing.) That suggests to me that Herbalife's corporate governance is severely deficient, and that shareholders should be extremely vigilant in looking out for their own backs. In practice, that means following the company closely, and only investing when you can do so at a substantial margin of safety.

The best way to learn what constitutes superb governance is to own the shares of a company led by a founder-owner with an exemplary record of corporate stewardship: Berkshire Hathaway's (NYSE: BRK-B) Warren Buffett is one example. The Fool's resident Berkshire Hathaway expert Joe Magyer has created this premium research report on the company. Inside, you'll receive ongoing updates as key news hits, as well as reasons to both buy and sell the stock. Claim a copy by clicking here now.


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  • Report this Comment On December 20, 2012, at 10:56 PM, TraderatWork wrote:

    According to finance.yahoo.com profile, Michael Johnson salary is 5.02 and he had sold/exercised 76.87millions worth of shares. The interesting part is that's after David Eihorn "incident" that the stock drop from 70+ to 45+, he sold some 175,580 shares, now why would you sell your company stock if you think your company is worth way more, if anything he should buy more using his own money if the company is viable?

    If the captain is jumping ship why would you buy into this company?

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