Don't Bet on Herbalife -- Enjoy the Show

Herbalife has become battleground for two investors; it's no investment opportunity.

Mar 13, 2014 at 11:08PM
Longview

Positive economic data released on Thursday morning was not enough to keep U.S. stocks in positive territory, as investors reportedly turned their attention back to the Crimean crisis. The benchmark S&P 500 ended the day down 1.2% -- erasing the last of its gains for the year -- while the narrower Dow Jones Industrial Average (DJINDICES:^DJI) fell 1.4%. Meanwhile, shares of Herbalife (NYSE:HLF) came under more pressure one day after it announced it is the subject of an investigation by the Federal Trade Commission, losing 5.1%, for a cumulative two-day loss of 12.4%. The stock may look cheap at less than 10 times next 12 months' earnings-per-share estimate; but you shouldn't fall prey to the allure of "cheap" -- unless you're knowingly looking for a cheap gamble (and I do mean a pure gamble.)

Where Herbalife may not provide investment value per se, it certainly has been a tremendous source of entertainment value as the battleground between two of the most aggressive and vociferous value investors of their respective generations, Bill Ackman of Pershing Square Capital Management and the legendary Carl Icahn. Once all is said and done, and regardless of the outcome, the "Herbalife affair" will be a classic Wall Street tale about huge, opposite-way financial bets and even larger egos. Ackman put on a $1 billion short position in Herbalife's stock, while Icahn is now the company's largest shareholder, with a 17% stake.

This week, Bill Ackman won a battle when his lobbying of U.S. Senator Ed Markey [sign-up may be required] paid off, as Herbalife announced that the FTC had opened an investigation into the multi-level marketing nutritional supplements company. But don't count Mr. Icahn out – this isn't his first rodeo, and he knows a thing or two about aggressive tactics. Furthermore, Ackman is still underwater on his "short" -- his firm disclosed last month that it was down 49% on the trade. Icahn's long position, on the other hand, is profitable.

Icahn isn't taking this latest salvo lying down, either. Herbalife announced today that it will delay its April annual meeting by five days in order to hold discussions with Icahn. Ackman has said that he will take the fight against the company "until the end of the earth," and he is exceptionally dogged (some might say stubborn.) But this situation could end before it gets that far.

Although I still think it's a low-probability outcome at this stage, I wouldn't be flabbergasted to see Icahn organize a going-private transaction (as an aside, Herbalife's $5.8 billion market capitalization is little more than one-fourth of Carl Icahn's estimated net worth.) Ackman had clearly been pondering adverse scenarios when he reduced his short position via shares and replaced it via options (which can't be called in by a broker).

Herbalife is a very unusual situation; but before you even consider putting a dollar into the shares, ask yourself: What information or resources advantage do I have over Bill Ackman or Carl Icahn? One of them is wrong, but how will you tell who? Investors will be smart to place Herbalife in their "too hard" pile – and enjoy the show instead.

A story you can invest in: The one stock you must own in 2014
There's a huge difference between a good stock and a stock that can make you rich. 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.

Alex Dumortier, CFA 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers