The Man Who Predicted the Housing and Sovereign Debt Crisis Is Selling Herbalife Ltd.

Find out what major catalyst he was so disappointed with.

Feb 20, 2014 at 9:17AM

Those who have read Michael Lewis' Boomerang are likely familiar with Kyle Bass. Not only did Bass -- the founder of Hayman Capital Management -- foresee and profit from the housing and credit crisis in 2008, but he also bet against the Eurozone's fiscal health prior to 2011.

Over the past year or so, Bass had accumulated a sizable holding of Herbalife Ltd. (NYSE:HLF) shares. The company has been in the crosshairs of some of finance's biggest names since famed investor Bill Ackman made it public knowledge that his Pershing Square Capital hedge fund was shorting the stock on claims that it was essentially a pyramid scheme.

Obviously, Bass disagreed. Before last quarter, Hayman Capital owned roughly 440,000 shares of Herbalife, worth about $34 million, and comprising about 7.5% of Hayman's overall holdings.

But then, something changed. When Hayman reported its stock positions last week, it was revealed that it had sold off all of its Herbalife shares by Dec. 31, 2013.


Source: Herbalife.

What happened to change Bass' mind?
Well, for starters, it's worth acknowledging that Hayman probably made a tidy profit on Herbalife shares, as they were up more than 100% last year -- not including dividends reinvested. It could simply be that Bass originally saw a company whose shares were beaten up and had lots of upside. 

Indeed, when Bass was researching the company -- before buying it -- he called every state's regulatory agency and found just 233 total complaints. That's an amount, Bass says, less than that of most legitimate retailers.

He also said that given the "new-normal" levels of high unemployment, it would be quite attractive for youth -- especially abroad -- to join the Herbalife sales force to try to earn a living.

The real reason he likely sold
But the big catalyst Bass was waiting for as recently as Dec. 5, 2013, was the reissuing of the company's audited financial sheets over the past three years. He said that when they came out, the company would be able to buy back a massive amount of shares.

Well, that audit did come out. And even though the company said there were no "material" changes to its accounting, a review of the newly audited reports showed losses in shareholder equity and net income from what had previously been stated.

Though we can't know for sure what Bass' reasoning was, it's likely he didn't like Herbalife's results, or the fact that management tried to downplay the equity and income losses as nonmaterial. For investors who remain with the company, a careful consideration of management's transparency -- and the scrutiny the company has gotten from the government since Jan. 1 -- needs to remain in the forefront.

For now, Bass and Hayman have cast their vote on this battleground stock.

A safer spot for your money this year
Herbalife could very well end up being a big winner this year, but much of it will have to do with what regulators might do if they deem the company to be predatory in nature. Surely, there are safer bets for YOUR money.

The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Brian Stoffel has no position in any stocks mentioned. The Motley Fool has the following options: long January 2015 $50 calls on Herbalife Ltd. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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