Thursday, December 20, 2012

Herbalife Plunges 13% After Ackman Short Report

Trading in Herbalife (HLF) was briefly halted earlier this afternoon after the stock saw a sudden double-digit drop. At the latest, trading has resumed and shares are down about 13%.

The plunge is being attributed to a CNBC report that hedge fund manager Bill Ackman, founder of Pershing Square Capital Management, has taken a short position in the company.

Herbalife is familiar with suffering at the hands of hedge fund managers: the stock has seen a very bumpy year in part because it fell into the crosshairs of David Einhorn, notorious for making bearish calls on companies.

Update:�Ackman will be talking publicly tomorrow at the Sohn Conference Foundation in New York — per the announcement:

Mr. Ackman, a longtime supporter of the�Sohn Conference�Foundation, which supports pediatric cancer research and care, will share his latest previously undisclosed investment idea with members of the financial community at the�AXA�Equitable�Center�in�New York City�on December 20, 2012.

Update 2:�Courtesy of my fellow blogger Tiernan Ray, here’s a rundown of Herbalife’s CEO making an appearance on CNBC:

Herbalife CEO Michael Johnson was on CNBC a short while ago to defend the stock against Ackman�s claims that it is a �pyramid scheme.� In a terse exchange with anchors, during which Johnson uttered little more than one- or two-word answers, he said the stock was being manipulated by a cabal of short sellers. When one anchor asked Johnson if there was a �misunderstanding� on some peoples� part, he responded simply �Yes.� When pressed on whether he would take action against Ackman or other parties, Johnson replied, �We want the SEC to take action.� A few moments later, Johnson begged off of any further questions. �You know, the lawyers are already going to be going crazy with me,� he said.

It’s also worth checking out the piece Bill Alpert wrote for Barron’s in May�highlighting some of the drawbacks to Herbalife’s business model:

Careful analysis of Herbalife and Nu Skin numbers�which we show in the charts nearby�suggests that over 90% of their U.S. distributors make no profit. International markets offer fresh prospects for the companies, but even so, Herbalife’s filings show it has to replace more than half of its distributor ranks every year. The world is large, but it is finite and increasingly well-informed. Herbalife chief Johnson has said that his company is the “intersection of health and wealth,” but the numbers show that distributors are capable of figuring out that it’s a dangerous intersection.

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