Don't Believe the Hype, Buy Herbalife

It was just a little over two years ago that Herbalife (NYSE: HLF  ) tanked, falling to $47 a share from just over $70 a few days earlier after Bill Ackman announced that he had placed a $1 billion short bet against the company. The plummet stalled for several months, and then Herbalife went under $30 a share in December of 2012. Since then, Herbalife has climbed upward on the back of hedge fund manager Carl Icahn, soaring upward by over 160% and trading at $83 a share for a time. 

Now the plot continues to thicken, as Bill Ackman has renewed his attacks on Herbalife by releasing a documentary in an attempt to prove that Herbalife is a pyramid scheme. Carl Icahn and Herbalife shareholders beg to differ, particularly because Herbalife has been operating since 1980, which is substantially longer than most pyramid schemes last. 

A pyramid scheme?!?
For those who are just beginning to follow the Herbalife saga, here is a brief recap. Bill Ackman placed an enormous short bet against Herbalife back in 2012 and publicly attacked the company, accusing the Cayman Islands-based multi-level marketer of being a pyramid scheme. Carl Icahn then made a large bullish bet on Herbalife and was joined by Dan Loeb for roughly a year, as both of them bet that Herbalife is and will continue to be a legitimate company. 

The point of contest comes down to the multi-level marketing business model of Herbalife. Some say MLMs are scams, others see MLMs as companies marred by past scams. While Bill Ackman may have mustered plenty of negative PR around Herbalife, its 34-year operating history makes it hard to believe that this company is entirely a fraud. On top of operating for decades, Herbalife continues to grow its active sales leader count, which was up 11% year-over-year. Even if certain aspects of Herbalife make shareholders twitch, this is still a company that generated $190.6 million in cash flow last quarter for an increase of 39% year-over-year.

Last quarter Herbalife posted adjusted earnings per share of $1.50, which significantly smashed expectations. While Herbalife did have to write down its cash balance in Venezuela due to foreign exchange issues, with that factored out it grew its adjusted EPS by 18% versus the same quarter last year. To further solidify Herbalife's bottom-line growth, unit volume grew by 9% over that same time-frame. Looking ahead, Herbalife has raised its full-year EPS guidance to $6.10-$6.30, a blow to shorts looking to see Herbalife's growth story cut short by bad publicity.

Foolish conclusion
Herbalife is going nuclear with its share buy-back program, and it has even gone as far as canceling its dividend so it can keep purchasing more shares. This will provide a rock-solid floor for the company that will shield it from almost anything Ackman can do to lower Herbalife's stock price.

The big question: Do you believe in the very promising growth story that is Herbalife, or do you think Herbalife is just one big scam and that Bill Ackman was right all along?

With an operating history of over three decades in the United States, it's hard to believe that this entire company is one big sham. Certain aspects of all multi-level marketing companies are similar to those of pyramid schemes, but their defining difference is the end consumer. As long as real demand exists for Herbalife's products, then this is a real company that is severely undervalued. 

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Read/Post Comments (17) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2014, at 11:21 AM, Zarthegreat wrote:

    Your article is inaccurate starting from the first sentence. Just so you know, and I am sure you can look this up on line. The stock tanked from 70 to the 40s because of David Ienhorn's questions during Herbalife's conference call that HLF could not adequately answer, and had nothing to do with Ackman's short, which wasn't announced for months after that.

  • Report this Comment On May 18, 2014, at 11:25 AM, Zarthegreat wrote:

    Ask Herbalife to provide documentation on their sales to "end consumers" and see what you get...

  • Report this Comment On May 18, 2014, at 2:05 PM, powershake wrote:

    Zarthegreat,

    Check out the SA comments to answer your Q of what is required of HLF on retail sales - look to find ShortCelery, sacathanas, Ben_nimaj, Davey Johnson, powershake on the thread (article Herbalife Does Nothing, Calls It Progress- http://seekingalpha.com/article/2201973-herbalife-does-nothi... ) The answer is deadly to to the Shorts!

    Bottom line Answer: all sales are accounted for - either sold to members, customers or sold back to the company.*

    All HLF has to keep track of is the sales going out of its warehouses minus any product returns.

    * Where did we hear that before? Humm, Belgian Court Ruling, coincidence - don't think so!

    Let us know what you think....

  • Report this Comment On May 18, 2014, at 2:25 PM, Ackmascam wrote:

    I agree with the basis of your article, however there are a few mistakes.

    It was 2 years ago that Einhorn questioned Herbalife and the stock toppled from $72 to the 40s.

    In December 2012, Ackman started his circus with the outrageus charges, 345 page phony slide presentation and made a very reckless $1 billion short bet on Herbalife with the very silly statement that HLF stock would go to zero. Haaaaaaaaa!

    You are right that Herbalife is not a pyramid scheme. They are operating in 91 countries and since 1980. Only Ackman and his followers think that Ackman has found something that the other regulatory bodies have missed since 1980. Really Bill? I don't think so.

    There has been a lot of hype about Herbalife from the short side. But when you put up a billion dollars (that is not even yours, but investors money) it is not unusual to expect hype and pure b.s. which is what we have seen here today on this thread and on SA and on yahoo.

    The bottom line is that Ackman has lost this. All of the people behind the so called investigations have been linked to Ackman starting with Sen. Markey. Connect the dots. If we can, certaintly the government can as well.

    Herbalife does not inventory load, distributors do not get paid for recruiting. As the the country of Belgium established, Herbalife is NOT a pyramid scheme. The FTC will do likewise here in the USA.

    Just because Ackman and his followers don't get this doesn't mean that the FTC won't.

    Nice article despite a few mistakes. Great way to start the week and you already have the shorts riled. I am sure QTR will come on with a ridiculous rebuttal which only he and the Ackman followers will believe.

    In answer to your question:

    The big question: Do you believe in the very promising growth story that is Herbalife, or do you think Herbalife is just one big scam and that Bill Ackman was right all along?

    I'll go with Herbalife. 34 years of strong momentum and now we know that Icahn and Soros have increased their positions while fund managers have added HLF. These are the big boys. Would they take such a risk if Herbalife was a scam? I think not.

  • Report this Comment On May 18, 2014, at 2:41 PM, earlcarroll wrote:

    meanwhile back at the ranch THE STOCK IS UP THIS MONTH.....bill stiritz, carl Icahn, George soros and several other billionaires who are long the stock and selling puts have done their own investigation...this group of billionaires have a lot better investigators, lawyers, and analysts than the government could ever hire.. do you think Icahn would have put so many on the hlf board if he had not done a thorough investigation...DUE DILIGENCE..it is what these billionaires do and they do it very well, ackman on the other hand NOT SO MUCH I use j c penny , target. and now hlf as my examples...these billionaires just keep selling puts and the puts just keep expiring worthless.. and once these investigations end and hlf gets a fine and a slap on the wrist the stock goes to 100 bucks a share and all the shorts will be SQUEEEEEZED like volkswagon was..this is going to make a great movie once it is over....one more thing...only 18 percent of hlf sales are in the united states so WHAT IS THE WORST POSSIBLE OUTCOME?? they lose 18 percent of there sales...IT IS NOT POSSIBLE FOR IT TO GO TO ZERO...

  • Report this Comment On May 18, 2014, at 2:56 PM, Zarthegreat wrote:

    Powershake, what you said has nothing to do with the truth. There is no deadly answer to shorts as HLF still cannot show its sales as they pertain to out of the network. This is the main underlying problem for the company. As it appears, most sales are within the MLM network which constitutes a pyramid scheme.

  • Report this Comment On May 18, 2014, at 3:04 PM, Ackmascam wrote:

    Zar,

    $7.5 billion ins sales. I understand that Herbalife has a 10 customer rule, if you don't show 10 customers, you don't get paid.

    The so called inability to prove customers is something Ackman has been pushing and only Ackman followers believe this.

    Also, I am so dissppointed that you didn't rebut me this time. My post followed Powershakes.

    As Earl Carroll stated, "do you think Icahn would have put so many on the hlf board if he had not done a thorough investigation...DUE DILIGENCE..it is what these billionaires do and they do it very well, ackman on the other hand NOT SO MUCH I use j c penny , target. and now hlf as my examples..."

    Due Diligence, something that Ackman and his followers never do. All the Ackmanaholics do is regurgitate Ackman's disproven analysis.

  • Report this Comment On May 18, 2014, at 3:18 PM, Zarthegreat wrote:

    JC Penny is not a good example. It has nothing to do with anything we are talking about, so I would not use it as such. It is a completely different business venture that has no correlation to the HLF short position.

    A much better example would be Ackman's short regarding MBIA, as we all know crashed and came close to Zero, as HLF might.

    Icahn on the other hand could be in this trade for many reasons. It could be to create a short squeeze, it could be for a trade, it could be to get back at Ackman for previous business ventures and could be simply due to him not understanding or marginalizing the underlying problems facing the company.

    Bill Ackman is very thorough and I assure you that if anyone does due diligence its him. Besides that there is the comn sense that we can all use to see the problems with HLF's business.

  • Report this Comment On May 18, 2014, at 8:23 PM, Ackmascam wrote:

    A much better example would be Ackman's short regarding MBIA, as we all know crashed and came close to Zero, as HLF might.

    Icahn on the other hand could be in this trade for many reasons. It could be to create a short squeeze, it could be for a trade, it could be to get back at Ackman for previous business ventures and could be simply due to him not understanding or marginalizing the underlying problems facing the company.

    Bill Ackman is very thorough and I assure you that if anyone does due diligence its him. Besides that there is the comn sense that we can all use to see the problems with HLF's business.

    1) MBIA was mostly luck, not skill. Even a 3rd grader could have predicted the mortgage crisis.

    2) Icahn would not put this much money into a trade just to get even with Ackman. Icahn would only invest this much if he had checked out the company and knew it had potential. This is Icahn we are talking about here, not Ackman. Icahn does not act first think later.

    3) Due DIligence on Ackman's part? C;mon. Who in their right mind risks $1 billion on a trade against a company that is exploding like Herbalife is and a stock that has now broken quarterly earnings 22 quarters in a row? No sensible trader that is for sure. Ackman was betting on his self proclaimed reputation and initially it worked, for about 2 weeks.

    Ackman wanted to extrapolate a $1 billion investment into a $45+ billion gain. If Ackman was as suave and astute an investor as he wants some to believe, he would have covered when HLF hit $24 in December 2012 or $49 just recently.

    Ackman is a gambler, pure and simple. Let's call a rat a rat.

  • Report this Comment On May 19, 2014, at 12:04 AM, ntyravgtrl wrote:

    I am so nauseous from reading all of the ignorant views on this stock. It's very simple... the network marketing / Direct Sales / Multi-Level Marketing (or whatever you want to call it) industry is and will always be controversial. Any business that operates in that space will always face a credibility challenge because the platform or business model is so close to what is/can be deemed illegal by regulators. There is an ebb and flow of public opinion on these companies. However, you'd be shocked if you knew how many celebrities, politicians, investors, athletes, musicians, etc have joined a Direct Sales company or are supporters of the industry. Our opinion of the business model (or Bill Ackman's) has very little to do with the actual legitimacy of these companies. This industry is a 160 Billion Dollar per year machine and would never have grown this big if there wasn't something to it. So, whether or not we like the concept is a little irrelevant. You can get on all of the threads you want and regurgitate Ackman and Fitzpatrick rhetoric or you can do your own research and attempt to understand the industry. I'm not saying you have to like it... you just have to understand it. Of course, if you're short on HLF then you have motive to spew... and that's ok. If you're on the fence and you do your own research I think you'll find a stock that has some strong upside potential. I'll come back to this thread in a few months and I'm confident we'll see HLF at 85 or higher.

  • Report this Comment On May 19, 2014, at 11:26 AM, Zarthegreat wrote:

    If you're nauseous from the criticism the company gets you're likely to through up when its stock goes to Zero...

  • Report this Comment On May 19, 2014, at 11:30 AM, Zarthegreat wrote:

    Why is it ignorant if you think MLMs are a scam for the most part and most people who get involved with them make money. It is a fact, and HLF is about the worst of the worst with their commission structure.

    It is bending the law, and avoiding rules and regulation, taking advantage of the vague laws that govern MLMs. This needs to change, and when this does, Herbalife is in big trouble, in my opinion.

  • Report this Comment On May 19, 2014, at 3:57 PM, callumturcan wrote:

    The average pyramid scheme fails within 7 years, yet Herbalife has kept on going for decades. Why would regulators and billionaires all of sudden go after Herbalife now, instead of 20 years ago? Makes little sense to me, seems like Bill Ackman's ego has gotten the best of him. If Herbalife is so bad, why is Bill Ackman paying a Herbalife executive $3.6 million over 10 years to "whistle-blow"? Herbalife doesn't need to payoff people to support its business structure, while Bill Ackman has been using his immense wealth, popularity within the financial field, and has spent millions outside of his short bet trying to bring Herbalife down. Seems fishy to me, and that's a good reason why Herbalife is trading at $63 today instead of $25.

  • Report this Comment On May 19, 2014, at 4:00 PM, callumturcan wrote:

    Not to mention that several other well known financiers have joined Carl Icahn in defending Herbalife, while Bill Ackman is relying on his popularity to stir up shorts who seek to destroy this company and all the jobs it has created.

  • Report this Comment On May 19, 2014, at 4:15 PM, powershake wrote:

    5/19/14 sacathanas Comments (1064) on SA

    What matters is the basis for commissions. Commissions based on recruiting UNRELATED to product sales presents a problem. Commissions paid that are related to product sales, all good. That is the basic question/distinction. There are nuances like whether the product sales are legit or just loading/dumping. But, when you have a sales-based commission system, and no evidence whatsoever of product loading/dumping, you have a legit MLM. It's been over 18 months of asking the shorts for any evidence of either (1) commissions based solely on recruiting and unrelated to product sales; or (2) commissions based on product sales that are forced or otherwise illegitimate, which we would expect to result in inventory loading, product dumping, etc. We could simplify these pages if the shorts would just supply any evidence at all of either (1) or (2), but instead we blather about Stalin, brainwashing, various Canadian fraud prevention "organizations," Latinos, McDonalds, Scientology, etc. It's fun, but it's not productive. It does, however, indicate a lack of "put up" from the accusatory side, which tells you most of what you need to know as an investor.

  • Report this Comment On May 22, 2014, at 12:01 PM, ChrisKash wrote:

    Mr. Callum Turdcan, how much did HLF or Icahn pay you to write this article? You certainly aren't a journalist.

  • Report this Comment On May 22, 2014, at 12:07 PM, ChrisKash wrote:

    Herbalife was, is, and will remain a pyramid ponzi scheme. Yes they are selling and will sell as long as there are gullible fools who get trapped into ponzi schemes. Despite millions of cases of Nigerian Princesses or Princes robbing people of hundreds of millions of dollars, people to this day send money to Nigerian princes and princesses. That does not mean it is not a scam, it only means they find more gullible people to believe and pay them. Callum Turcan is one such scam artist.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2961948, ~/Articles/ArticleHandler.aspx, 10/30/2014 9:43:58 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 16,974.31 -31.44 0.00%
S&P 500 1,977.50 -4.80 -0.24%
NASD 4,549.23 -15.07 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/29/2014 4:00 PM
HLF $49.94 Up +0.37 +0.00%
Herbalife CAPS Rating: *

Advertisement