The much put upon Herbalife (NYSE: HLF) will post its earnings for the first quarter of fiscal 2016 on Thursday, and I’m going to go out on a limb and anticipate it will meet analysts’ estimates, if not beat them.
When I say “much put upon,” and “going out on a limb,” I’m referring to hedge fund manager and activist Bill Ackman who took controversial steps to run the company out of business. Claiming that Herbalife is a pyramid scheme, he shorted the supplier of weight management and nutrition supplements by $1 billion in 2012.
Ackman is convinced that Herbalife preys on minority communities who reap little in financial gains for being distributors of Herbalife products. Through extensive lobbying efforts, hours-long Power Point presentations, Ackman has managed to convince some lawmakers to join his cause in getting federal regulators to investigate and shut down Herbalife.
Although Ackman’s cause seems notable, on the surface, beneath it smacks the type of greed that could lead even the most well-intentioned causes failing to bear fruit.
· Smooth sailing until Ackman
Prior to Ackman’s crusade to shut it down, Herbalife had posted 12 straight quarters of record earnings. It had enjoyed 12 straight record quarters and was trading around $52 in 2011, which was before Ackman’s billion-dollar short announcement.
Shortly after Ackman made his short position public in December 2012, Herbalife fell almost 50% in one day to close at $27.27. Over the course of 2013, and amidst volatile trading of its stock, the price slowly, but steadily, rose. It even hit an all-time high of $81.81 in January 2014. It closed Friday at $57.95.
· Traders vs. investors
The volatility that Herbalife has experienced since Ackman’s attacks started make the company’s stock attractive to traders who can watch the stock’s movements like hawks and profit from them. After all, volatility is a trader’s best friend because of the potential for huge profits.
Volatility is not so good for long-term investors. It has a five-year beta of 1.4, which means it’s roughly 40% more volatile than the stock market. So long-term investors may want to shy away from Herbalife right now; at least there is some kind of resolution of squashing of Ackman’s allegations.
Interesting about analysts’ views on Herbalife are their reports. Since December 2012, there have been only two analyst downgrades. The others were reiterations, and there was even an upgrade. There have been mostly “buy” recommendations over that period.
· When Wall Street meets Capitol Hill meets The Feds
In pursuing his effort to run Herbalife out of business, Ackman has called on community leaders, especially those that represent Hispanics and African-Americans, to join his cause. Many agreed to write lawmakers to urge the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) to investigate Herbalife. Ackman has also called on a slew of lobbying groups.
He’s been accused of assembling his supporters based on false information. Fortune magazine highlighted the tactic of astroturfing, in which “a client’s agenda is made to look like a grassroots movement. In the context of a short-selling campaign, however, such conduct began to resemble securities fraud. The SEC has held that if you make claims about a company you’re trading in and then falsely publish them under someone else’s name, that can be market manipulation, even if you believe the claims to be true.”
There are reports that some of those who signed these letters don’t recall doing so.
So far, other heavy weight hedge fund managers have been unpersuaded by Ackman’s findings. Take notary hedge fund manager Carl Icahn, for example. After Ackman presented his exhausting presentations about the legitimacy of Herbalife’s business model, Icahn took a long position in Herbalife. Another reputable investor, George Soros, also revealed a large stake in Herbalife after Ackman began lambasting the company.
For the sake of investors, small and large, I hope that The Feds do help resolve this issue. In the short-term, the market this week will get another chance to see how Herbalife has weathered the Ackman-generated turmoil that has wreaked havoc on its stock. As I noted above, the company reports earnings for the first quarter of fiscal 2016 on Thursday. Estimates are that it will report earnings of $1.07 per share; and $1.07 billion in revenue.