Why Herbalife Ltd. Stock Tumbled Today

Is this meaningful? Or just another movement?

Jeremy Bowman
Jeremy Bowman
Jul 21, 2014 at 8:18PM
Consumer Goods

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Herbalife Ltd. (NYSE:HLF) were getting dinged again today, finishing down 11% and falling more after hours after short-seller Bill Ackman said he would show in a presentation tomorrow why the multi-level marketer is a "massive fraud."

So what: Ackman, a noted activist investor and the head of Pershing Square Capital Management, said his company spent two years working on an undercover investigation that shows the seller of nutritional supplements is a pyramid scheme. Ackman went as far as to compare Herbalife to Enron, and this is just his latest volley against the health-supplement company, which he first accused of being a pyramid scheme back in December 2012.

Now what: That Herbalife shares fell so sharply today is evidence of Ackman's sway on Wall Street, but Herbalife stock has bounced back from his attacks before. Shares plummeted down to $27 back in 2012, when he made his first presentation, but they tripled over the next year. The hedge fund manager also convinced the Department of Justice to initiate an investigation against the company. Herbalife is not without its defenders, however, as Carl Icahn has been a supporter and investor in the stock. Who knows what Ackman will say tomorrow, but at this point the debate seems more like political theater than an honest assessment of the company. Herbalife has been in business since 1980, and like many multi-level marketing companies, its model has come under scrutiny. Ackman's presentation may force the stock lower tomorrow, but the company is unlikely to go out of business, and the stock is cheap at an estimated 2015 P/E of 7. I'd expect to Herbalife to recover over the long run.