Herbalife Slams Ackman on Twitter: Why That Could be Terrible for Shareholders

Embattled multilevel-marketing giant Herbalife (NYSE: HLF  ) has taken to social media to defend itself against hedge fund manager Bill Ackman. Dubbing him the "Worst of Wall Street," the tweet is part of the company's aggressive response to critics it accuses of running a smear campaign.

Herbalife has every right to defend itself against attacks it believes are baseless (Ackman and others have described the company as a pyramid scheme). However, the company's investors might wish to reconsider their stakes in the wake of this finding: Historically, companies that have aggressively gone after their short-selling skeptics have, more often than not, proven those critics right.

Attacking the shorts is a bad sign
"If you own shares in a company that declares war on short sellers, there is only one thing to do: sell your stake," The New York Times' Gretchen Morgenson wrote back in 2003. She continued:

That's the message in a new study by Owen A. Lamont, associate professor of finance at the University of Chicago's graduate school of business. ...The study, which covers 1977 to 2002, shows not only that the stocks of companies who try to thwart short sellers are generally overpriced, but also that short sellers are often dead right.

Lamont's study looked at the trailing performance of 270 companies that had been targeted by, and chose to respond to, short-selling campaigns. The responses varied in significance -- from accusing their critics of fraud, to suing the short-sellers, to making it difficult to borrow shares. Overall, the stocks of these combative companies underperformed the market by an average of more than 2% in each of the 12 months after the company's response.

Working to create a short squeeze is an even worse sign
Lamont found a difference in performance based on the actions the targeted companies took. Those that sought to reduce their float, impeding the ability of short-sellers to borrow their stock, did the worst -- underperforming the market by around 5% a month.

This is the strategy Herbalife appears to be employing. With large portions of the company held by just a handful of investors (Carl Icahn with nearly 17%, Bill Stiritz with more than 6%, and Richard Perry and George Soros each with about 5%) and the multilevel marketer engaged in an aggressive share repurchase program, Herbalife bulls have consistently argued that the company could be on the verge of a major short squeeze.

Lamont warns investors to stay away
But Lamont's research suggests investors would do well not to bet on such an outcome. "Wall Street wisdom suggests that high short interest stocks are good to own because they may rise due to a short squeeze," he wrote. "[But] the evidence shows that when firms take anti-shorting actions, their stock returns are extraordinarily low over the subsequent months and years."

Of course, there are a variety of possible explanations for this outcome, but one stands above the others: Often (though admittedly not always) those entities that were accused of fraud were, in fact, fraudulent, and were put at severe risk by the short-sellers working to expose their con. The companies that responded to their critics had the most to gain by such action, while those that were doing nothing wrong could simply go about their business, confident that things would work out in the long run.

To put it another way, when I see this picture on Herbalife's social media page, I am reminded of a famous Shakespeare quote: "The lady doth protest too much, methinks."

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Read/Post Comments (8) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On May 21, 2014, at 10:15 AM, Lostnconfused wrote:

    I always look at the disclosure statement to decide if I will read the article. If no position is held then I'll read it. If a position is held in the subject security I don't waste my time since it is going to be a biased opinion.

  • Report this Comment On May 21, 2014, at 10:23 AM, Zarthegreat wrote:

    It's not gonna work!!

    They are atempting a short squeeze right now as we, speak.

    No one else wants to buy their shares, so Herbalife is just going to do it themselves...

    What a crooked company, everything about it reeks.

  • Report this Comment On May 21, 2014, at 11:44 AM, mike2cu2 wrote:

    After seeing this author is short selling Herbalife, I comment and move to the next article, knowing it will be a baseless bashing to drive the stock lower and make money from it. The fool should only allow articles from authors that have no stake in the company they are addressing to enhance credibility.IMHO

  • Report this Comment On May 21, 2014, at 12:33 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 21, 2014, at 12:46 PM, powershake wrote:

    The shorts don't think that HLF is a pyramid scheme they "HOPE" that it is.

    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**

    4) Commissions paid related to product sales only

    5) Good customer service. Small # of complaints

    * 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 21, 2014, at 2:20 PM, Ackmascam wrote:

    Two articles two days in a row by Sam. And what is the result? HLF up over 2% today, Obviously the market is not buying what you are peddling. Looks like Herbalife's rebuttal to Ackman was well received by the market.

    None of what Ackman said about Herbalife has any bearing on fact. Everyone knows this by now. And you are right on one point, Herbalife has every right to defend itself in this case with Ackman against malicious lies and misinformation.

  • Report this Comment On May 22, 2014, at 5:35 PM, TMFVelvetHammer wrote:

    Since my handle starts of with a "TMF" prefix, I'm sure many will immediately dismiss my comments, but I think it's actually pretty valuable that The Fool supports writers covering companies that we have a vested financial interest in, even a short position.

    The majority of my articles are about companies that I own shares in, and I don't think that necessarily makes me any more biased than many journalists who write about tech companies that they may have zero financial interest in.

    Bias is part of human nature, and stock ownership doesn't mean that our bias is necessarily more or less. But it does mean we have a vested interest.

    And since there are no anonymous writers for The Fool, you're not going to see unethical short attacks, based in misleading or false information.

    Also, every article on Fool.com goes through at least 2 editorial Fools before publication, and The Fool's reputation is a LOT more important to our editorial folks than Sam Mattera's short position in HLF, that I can promise you.

    Lastly:

    The MOST IMPORTANT articles you should read are the ones that you disagree with. What it you're wrong?

    Being wrong in this game costs you money. Challenge yourself. Challenge your investment thesis every chance you get.

    Foolishly,

    Jason Hall

    TMFVelvetHammer

    Fool.com contributor

  • Report this Comment On May 23, 2014, at 11:26 PM, RogierFvV wrote:

    Methinks the lady doth protest too much

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