Shares of Herbalife (HLF 2.10%) recently rose as much as 20% on the day that the company was deemed by the Federal Trade Commission (FTC) to not be a pyramid scheme. "Not a scheme" is good news, although the FTC ruling does not change the fact that there has been significant chatter over the nature of this company.
Still, being declared "not a scheme" is way better than the alternative and the ruling should help Herbalife going forward.
In this clip from the Motley Fool Money radio show, Chris Hill, Ron Gross, and Jason Moser explain just what the results of the investigation were. They also discuss why billionaire hedge fund manager Bill Ackman's Herbalife actions have painted his portrait as an investor in a less-than-shining light.
A full transcript follows the video.
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This podcast was recorded on July15, 2016.
Chris Hill: Shares of Herbalife up nearly 20% on Friday as the Federal Trade Commission announced it has determined that Herbalife is not, in fact, a pyramid scheme. Boy, that seems like a damning with faint praise, Ron, but this does have real money implications.
Ron Gross: Yes. But it's not all peaches and cream for Herbalife. They do have to pay a $200 million fine, and they do have to agree to restructure their business. They weren't deemed to be completely ... I don't want to use the word "guilt," but, without guilt. They're going to have to restructure their business so that just distributors are rewarded for what they sell, not how many people they recruit. Now, that very much seems to me what Bill Ackman was calling the pyramid scheme part of this. The FTC is saying, "All right, you do have to make that switch there." They're not giving Bill Ackman his due, but they are insisting on changes.
Stock reacted favorably to that, because being deemed a pyramid scheme would have been disastrous, paying $200 million is not.
Hill: Yeah. Jason, in terms of public heavyweight fights between big investors, this was maybe the biggest. You have Carl Icahn on one side, very much a backer of Herbalife, Bill Ackman, hedge fund manager heading up Pershing Square, he's having another really bad day.
Jason Moser: Yeah. I hate to go out there and just pick on someone just for the sake of picking on them ... I fired off a tweet this morning making fun of Ackman, to a degree. I'm normally not going to be very quick to do that, but in this case, I think he totally deserved it, because he really put himself out there. I mean, I think he called Herbalife, like, this was the investment thesis of his life. He has just never wavered. I think when you look at the way he has conducted himself here, I think the way he has conducted himself in Valeant Pharmaceuticals ... it's not to say he's not a smart guy. He has some investing prowess. But I think one of the keys with investing is humility. It's being able to look back at yourself and say, "Whoops, you know what, I got something wrong there." And jumping out there and admitting it, and learning from it. I think this is a lesson in hubris and what not to do as an investor.
Gross: Agreed. He does take looks back, if you read his annual reports, he will take a look back at previous years and point out things he did wrong. But, he's coming off what looks like it's going to be two years in a row of very sub-par performance, down around 20% last year, it looks like through the first half of this year around the same kind of negative performance, you don't survive that long in the hedge fund industry, especially in this environment, where hedge funds are coming under some scrutiny, unless you put up the right numbers.