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Latest Herbalife Probe Reinforces Underlying Risk

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Herbalife (NYSE: HLF  ) remains an enigmatic business. The company can seemingly refute any claims regarding the legality of its multilevel marketing business and has the support of some extremely intelligent, experienced mega-investors. At the same time, the consumer-level evidence against it is hard to refute, and the scarcity of regulatory support suggests there are still many unknowns. Last week, the FBI announced a criminal investigation into the company's practices -- sending the stock down double digits and giving its most outspoken (and anti-investment) opponent, Bill Ackman, new ammunition for his quest to take the company to zero. Where does the retail investor stand?

Mixed messages
With many businesses that attract negative PR -- oil, cigarettes, and firearm businesses come to mind -- there is no debate as to their social, environmental, or geopolitical effects. And when it comes time to show the money that flows through these companies, their investors focus little on what is already known.

Herbalife, while not a slinger of death-inducing, world-melting products, is widely known for its targeting of people on the lower end of the socioeconomic spectrum to benefit a few people higher up the chain of command. Its sales, too, are hard to ignore, as the company continues to post healthy sales and profit growth. Meanwhile, one of the uberinvestors of the world, Bill Ackman, has put $1 billion toward the notion that the company is operating illegally. He's spent hundreds of millions supporting his thesis and keeping the short alive, all while his adversaries (Carl Icahn, among others) pile in on the other side.

Herbalife's new auditor, PWC, completed a multiyear re-audit and found no irregularities in the company's statements. At the same time, the biggest Hispanic rights organizations in the United States came out asking politicians to intervene in what they claim is the "worst player -- bar none -- operating in the Latino communities across the country."

For the average investor trying to determine the legitimacy of Herbalife's business, the evidence seems nearly irrefutable on both sides of the line.

The only hope for some sort of settlement is a decision in Washington, and that may be getting closer. Last month, the Federal Trade Commission announced a civil probe into the company's marketing practices. Now, CNBC reports that the FBI is conducting its own. In true Herbalife style, management claimed they had no knowledge of such an investigation, which seems odd.

Where to stand
What will come of the FBI investigation or the FTC one? Who knows. To Herbalife's advantage, the company operates in a gray area that may allow it to do what it does without threat of regulatory risk, at least in the near term. For investors, the story remains the same: Look elsewhere. There are plenty of companies growing quickly and booking attractive year-over-year gains, and they don't attract near the conflict and drama that this one endlessly does. Let the superstar egos duke this one out. If a final answer comes up, then one can consider the way to play it.

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Read/Post Comments (3) | Recommend This Article (0)

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  • Report this Comment On April 15, 2014, at 1:51 AM, thedubliner wrote:

    Michael, your article demonstrates your ignorance of the multi level industry and Herbalife in particular.

    If you even bothered to be on a quarterly confcall you would have heared that the company keeps hammering on "daily consumption" methods Vs recruting.

    Herbalife has ended the distributorships of 2 Chairmans Club because they were not respecting HLF rules and the company is actively pushing its independent distributors "to do the right things".

    Your statement "is widely known for its targeting of people on the lower end of the socioeconomic spectrum to benefit a few people higher up the chain of command" is so biased!

    You obviously know NOTHING about the HLF business but you got a few bucks to write this stupid article.

    Congratulations for your incompetence.

  • Report this Comment On April 15, 2014, at 12:27 PM, nateacreman wrote:

    There is some miss leading information posted here. First I am a current Herbalife distributor, I have been doing it for a little more than a year and have been fairly successful in that time.

    You said that the FBI and the US DOJ announced last week they were investigating Herbalife, this is false. All articles that stated there was a Herbalife investigation used an anonymous source "close to the situation." It was later added that the source worked for the FBI. The FBI for their part, neither confirmed nor denied the rumor. The US DOJ is the office in control of the FBI, so this isn't two different organizations and two different new probes but likely just one probe. It was also stated that the investigation has been going on for months and so far noted that they have found nothing illegal so far.

    You also made mention of the so called fact that Herbalife targets low income minorities. No one at this point, however has presented any evidence supporting this claim other than a high volume of low income minorities who are also Herbalife distributors. The question I have is what has Herbalife used to target these individuals? As for herbalife as a business, there is no inventory requirement, I in fact keep no inventory, no bonuses for receuitment, and all bonuses are entirely based on sales alone. So it does me no good to bring someone in, and set them up for failure.

    I, by the way, have over 20 regular customers. My customers span 7 or 8 states from California to New York. Our network market is only limited to how many people I can talk to, and thanks to Social Media, that is next to unlimited.

    Thank you for your time.

  • Report this Comment On April 15, 2014, at 3:44 PM, Jerry0073 wrote:

    ignorant, I work as a loan officer, and I have never seen any distributor with income from herbalife, (I have helped thousands of people, 20 years in this field) and the ones that I know and represent herbalife are broke, and fat, and full of excuses, of their situation that they are in, and honestly any of their stories it does not make any sense, if they pay you for defending herbalife, I get it, but if not please do some research before you get into this mess. They also tell people to make up income, "fake

    until you make it" quote by a top executive. I have a relative that for 7 years has been in herbalife, and from owning a home now is renting, that is damage to hard working people who could not go to college and has and others that take advantage of their situation, many years ago I lost my job and I almost fell for amway, but some how I got out their cult, and I know how they wash people's brain, Thank you Robert Fitzpatrick, and thank you

    Thank you Mr. Ackman, I truly hope justice will come soon, This is USA who loves capitalism, free markets, this is not USA rip off the middle and lower class, Mr. Icahn and all of those who invested money in herbalie, do your due diligence, before you invest, and recognize what you have done. and stop hypnotizing distributors in your seminars, look into youtube to see how those seminars look like.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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