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Why Herbalife Shares Dropped and Then Reccovered

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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 nutritional-supplement seller Herbalife (NYSE: HLF  ) were down as much as 13% this morning on reports from the New York Post ¬†that it was subject to an investigation from the Federal Trade Commission. However, the stock bounced back into positive territory after Herbalife said those reports were false.

So what: Today's news is only the most recent ordeal in the saga surrounding the battleground stock, which has been extremely volatile since activist investor Bill Ackman called it a "pyramid scheme" in December. The Post claimed that a Freedom of Information Act request submitted to the FTC revealed 192 complaints against the multilevel marketer, including ones from its own distributors accusing the company of deception and other questionable practices. The Post also said there was a pending probe against Herbalife.

In its response, Herbalife did not deny the validity of the complaints but said there was no probe from the FTC. The company demanded a correction from the Post and said that for a company of its size it had received a relatively low number of FTC complaints.

Now what: This stock is clearly not for the faint of heart. Ever since David Einhorn raised questions about Herbalife's accounting practices and business model, the stock has been bouncing up and down like a bungee jumper. Considering the company has been around since 1980, it's hard for me to believe Ackman's claim that this is a pyramid scheme, but the FTC complaints do raise suspicions. There may be an opportunity here, as the embattled stock appears to be trading at a discount, but risk-averse investors should best stay away.

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  • Report this Comment On February 04, 2013, at 8:24 PM, mfentonreb wrote:

    I feel the need to quantify the information herein. The 192 complaints were over a period of 7 years. That is an average of about 27 complaints per year. For a company that Herb Greenberg claims signs up 2.7 million new distributors per year, that is very small. It is only 0.00001% per year. This seems amazing for a company that the media is painting as evil.

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