Herbalife Has the Backing of These Legendary Investors

Is Herbalife (NYSE: HLF  ) a pyramid scheme on the verge of an FTC shutdown? If so, some well-regarded hedge fund managers and a legendary CEO could be about to lose a significant chunk of capital.

As of the end of March, funds managed by Carl Icahn, George Soros, and Kyle Bass owned stock in the multilevel marketer. Bill Stiritz, the CEO of Post Holdings, has used his personal fortune to buy more than 5% of Herbalife.

Herbalife bulls often take to citing the presence of these investors as sufficient reason to buy shares of Herbalife. While I can't dismiss their legendary track records, I can say confidently that investors in the company shouldn't blindly follow them into any particular stock -- Herbalife or otherwise.

Icahn is often right, but not always
Carl Icahn amassed his $23 billion fortune by being right more often than he's been wrong. Still, Icahn has had some significant misses over his career, and he doesn't pretend to be infallible.

Most recently: Blockbuster Video. Icahn amassed a significant stake in the company in 2005, and rode it all the way into bankruptcy. He lost more than $300 million on his investment in the now-defunct movie rental chain, and flatly declared it the worst investment he'd ever made. If Herbalife is shut down, it will top his Blockbuster blunder.

"Can I be wrong?" Icahn said in an interview with CNBC last year. "Sure. I've been wrong before."

Soros is a trader with limited involvement
While Icahn is an activist shareholder, often committed to his investments for long periods of time -- Herbalife, in particular, with his seats on the company's board of directors -- George Soros has made his billions from trading.

As Soros is known for changing his mind frequently, there's no telling why he invested in Herbalife, or for how long he intends to stay in the company. Like Dan Loeb's Third Point, his funds may have bought Herbalife for a short-term trade. Soros has made no public statements in regard to Herbalife, leaving investors completely in the dark in terms of what he may see in the company.

That's assuming he sees anything at all. Although his funds still bear his name, Soros has largely been in retirement for the last few years, with limited involvement. Of course, Soros' employees don't carry the same name recognition, but it may be more accurate to say the individuals Soros has hired to watch his money are betting on the multilevel marketer, rather than the Hungarian philosopher himself.

Bill Stiritz is known as a manager, not an investor
Bill Stiritz is renowned for his experience managing a variety of consumer goods companies, from Purina to Post Holdings. While his management acumen is without question, his reputation isn't the by-product of intelligent investing.

Stiritz has experience with protein powder, and consumables, but not multilevel marketing -- or for that matter, multilevel-marketing companies facing a great degree of regulatory scrutiny. According to Bloomberg, Stiritz's investment in Herbalife was motivated by his friendship with Carl Icahn and his discussions with former Herbalife analyst Tim Ramey, whom he later hired for a special position at Post.

Kyle Bass has a mixed track record when it comes to equities
Kyle Bass has gained some notoriety in the hedge fund world for his prescient and extremely profitable calls on the European debt crisis, and his long-standing contention that Japan is a society on the verge of a demographic-fueled collapse.

However, his individual equity investments have been decidedly less interesting and less impressive, particularly in recent months. Last year, at the Ira Sohn investment conference, he recommended Dex Media -- shares are down more than 50% since then.

Obviously, one poor call does not negate Bass' larger track record, but if he was wrong on Dex Media, who's to say he's not wrong on Herbalife?

Herbalife is not about the 13Fs
For investors interested in Herbalife, it is not a question of which legendary hedge fund manager or business magnate has bought the stock -- or for that matter, sold it short. (Although Ackman is the only hedge fund manager to have gone public with his position, it's possible other big name investors are betting on the firm's collapse. Unlike long positions, shorts do not have to be disclosed.)

Rather, it's a question of the legality of Herbalife's business model -- is the company operating an illegal pyramid scheme? If the FTC ultimately comes to that conclusion, it won't matter who's holding the stock.

A better investment than Herbalife?
Give me five minutes and I'll show you how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.


Read/Post Comments (9) | Recommend This Article (1)

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 20, 2014, at 2:27 PM, powershake wrote:

    To Sam the author or anyone...

    Can you name us a MLM company that was found to be a pyramid scheme by the FTC that had:

    1) No inventory loading*

    2) No recruiting payment

    3) Excellent Return Policy**

    * Members can become supervisors over a 12 month period. Monthly purchases are cumulative until 5k volume is reached.

    ** HLF Gold Standrad http://bit.ly/1phPHDh - Member can return products for a full refund within 1 year of purchase, Free shipping both ways. Introduced in 2012 and in current Q1 2013 HLF has the lowest product return in history 0.2%

  • Report this Comment On May 20, 2014, at 2:51 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 20, 2014, at 2:55 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 20, 2014, at 2:58 PM, powershake wrote:

    To Sam the author, did you forget Perry?

    Richard Perry disclosed his hedge added Herbalife in 1st quarter amassing a 4.8% stake by purchasing another 1.8 million shares

  • Report this Comment On May 20, 2014, at 3:09 PM, Ackmascam wrote:

    Interesting piece Sam but once again you are assuming that Herbalife that will shut down and there is no basis for that happening. As I and others have mentioned previously, Herbalife does not

    1) Inventory load

    2) Does not pay head hunter fees

    3) Does not pay merely for recruitment

    And they do provide a full money back guarantee to distributors for up to one year.

    Herbalife is

    1) A real company

    2) With real people

    3) Real products that are in demand

    4)Owns world market share for meal replacement

    shakes

    Ichan has made some mistakes for sure, he lost on Blockbuster, but look at his averages. Soros made a billion dollars in one day and is no fool nor is Stirwitz or Bass and by the way you failed to mention the fund managers who own HLF like Fidelity and others. Are they fools too? I hardly think so.

    As usual your article was very one sided. You never mentioned the many losses Billy Ackman has had which far exceed Icahn and the others. And you fail to mention the risk shorts have in following this gambler. I wonder why??????

  • Report this Comment On May 20, 2014, at 6:18 PM, TMFMattera wrote:

    @powershake

    Perry took a bath on JCPenney -- I'm sure he has had other significant losses over the years. The larger point is that these guys occasionally strike out. Buying into HLF just because a few hedge fund managers have is not an intelligent strategy.

    @Ackmascam

    I am not saying Herbalife is guaranteed to be shut down -- far from. But even the bulls have to admit that it's a possibility. There are trades out there that, if Herbalife were to get shut down within the next 12 months or so, would pay out at 10x. Do I think the probability of a shut down is greater than 10%? With the many questions Ackman has raised, and with several government agencies investigating the company, I would say yes, which is why I am long puts. The risk/reward profile is attractive.

  • Report this Comment On May 21, 2014, at 1:20 AM, powershake wrote:

    @TMFMattera,

    So Ichan,Stiritz, Soros, Perry, et al, have struck out on occasion and so has Ackman - what's the point?

    They are coming in for the kill. Short squeeze on the way, 35% of the float!

    Thanks for your reply but you did not answer my first question also same question strengthen by ackmanscam.

    Remember - 'the FTC has NOT been asleep at the wheel for 34 years, it preposterous" Dan Loeb

  • Report this Comment On May 21, 2014, at 2:13 AM, TMFMattera wrote:

    @powershake

    That is the point. Bulls have consistently argued for the stock on the basis of its hedge fund ownership (as an example, see Earl Carroll's comments in this thread) which is not a good idea. Even the best make mistakes.

    As for your earlier questions -- it is debatable whether or not Herbalife has inventory loading, or if its return policy is "excellent." Even with the recent revisions, Herbalife only accepts products they deem "resallable." (See their statement of average gross compensation.) Also, note that its return policy revisions only come after the scrutiny placed on the company. FHTM made several changes to its own policy, slashing its start-up fee several times while being investigated, but was ultimately shut down anyway.

  • Report this Comment On May 21, 2014, at 1:23 PM, powershake wrote:

    Where are the garages full of Inventory? Where are the complaints asked AG from Nevada? Where are 1000's of members unable to sell their products?

    HLF had a record Q1 with 84,000 new members, where are the returns? At their lowest levels - .02% for the past year!

    HLF has the best return policy in the industry, its unprecedented. Before the Gold Standard return policy, HLF had the industry normal, acceptable return policy of 10% restocking fee.

    FHTM paid members for recruiting.

    Also FHTM required a monthly investment of members to participate in their compensation plan, therefore, inventory loading.

    Ichan al et, know the FTC is will give HLF a slap on the wrist at most and the STOCK PRICE WILL SOAR

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: 2964516, ~/Articles/ArticleHandler.aspx, 12/19/2014 1:40:23 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...


Advertisement