Hayman Capital Trades in and out of Herbalife. Should Investors Follow Suit?

Has Kyle Bass figured out how to make money with Herbalife?

May 23, 2014 at 6:45PM

Every quarter, large money-managers have to disclose what they've bought and sold via "13F" filings. While Fools don't always (or even usually) follow what the big money does, we can often glean an idea or two by tracing their footsteps. 

Hayman Capital's Kyle Bass has spent the past several quarters riding the Herbalife (NYSE:HLF) wave that fellow hedge fund giants Carl Icahn and Bill Ackman have created.

Source: Herbalife.

For those not in the know, Bill Ackman, managing partner of Pershing Square Capital Management, has made a billion-dollar bet against Herbalife, accusing the company of being a pyramid scheme and engaging in illegal activity. Fellow activist investor and hedge fund manager Carl Icahn, quickly (and aggressively) rushed to Herbalife's defense, making his own bet that Herbalife will win out. Icahn currently holds some 17 million Herbalife shares, worth almost $1 billion. 

Let's look at Hayman Capital's moves and what's happening with Herbalife. It's not smart to attempt to copy the moves big investors make -- frankly, it almost never works -- but if we can learn something about the company at hand, it could lead to better investment decisions. 

Buying low, selling high
According to Hayman Capital Management's quarterly 13F filings, Bass has alternated between buying and selling both shares and options of Herbalife, as the stock has swung wildly based on the market's fear and optimism over what the end result of the battle between these titans will be:

HLF Chart

HLF data by YCharts

Here's the same chart, only with Hayman Capital Management's quarterly activity overlaid:


HLF data by YCharts.

In short, it looks like Bass has managed to really time the swings in Herbalife's stock in recent quarters. The thing is, we don't know exactly when any of these transactions happen. All the 13F shows is the end result -- i.e., how many shares or option positions the firm held at the end of the quarter and what the net change was from the prior quarter.

In other words, it's possible -- even likely -- that Hayman Capital bought and sold shares every single quarter, no matter what the net result was at the end of the quarter. 

What's up with Herbalife? 
As an investor, this is the question that matters. The reason is twofold:

  • You'll never be able to follow a hedge fund manager, as the 13F data is months old before it's made public.
  • The evidence is overwhelming that individual investors are most successful when buying and holding stocks for years at a time. 

And honestly, there's still plenty of speculation about Herbalife right now. The company has met with Pershing Square investors and made public statements to defend itself -- most recently in this press release, which in part says:

Mr. Ackman has spent more than $20 million to date on his campaign against Herbalife. Herbalife views the release of this advertisement posing as a "documentary" as nothing more than propaganda. The company believes this is yet another tactic in Mr. Ackman's calculated, coordinated and well-funded effort to destroy a 34-year-old company and support his $1 billion bet against Herbalife.

As frustrating as the issue may be for Herbalife shareholders and executives, the best cure for a short attack is business performance, and the more effort, time, and money the company invests in defending itself, rather than letting its business results do the talking, the more credence it lends to Ackman's attack. After all, Herbalife has improved net income by 27% over the past two years, while also buying back some 13% of shares outstanding.

The stock price at the end of December was up almost 50%, while earnings per share were up about 48%, essentially saying the company was valued -- based on earnings power -- the same as it was at the end of 2011. Yet it has given up a lot of gains this year, and the company's earnings have fallen as well. 

Long-term outlook 
Herbalife's stock price is down about 21% year to date, so on the surface it looks like it could be a good opportunity to buy. However, it's pretty clear that Ackman isn't going to let up anytime soon, and Herbalife's decision to get involved in the conversation will only make it even more public. This could be a detriment to the business if non-investor customers start seeing and hearing more about it. Simply put, Herbalife stepping into the fray could scare away business. 

There are just too many questions still unanswered, and a massive amount of money being held both for and against Herbalife right now by a small group of powerful players. I wouldn't be willing to invest in that level of uncertainty in very many companies, and Herbalife isn't one of them. 

Your conclusions may be different, but there's just too much noise -- and outside risk -- with Herbalife right now. 

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Jason Hall has no position in any stocks mentioned. The Motley Fool has the following options: long January 2016 $57 calls on Herbalife. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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