by Lawrence Meyers | January 8, 2014 1:30 pm
Herbalife (HLF) quickly became one of the biggest market stories in late 2012 when activist investor Bill Ackman of Pershing Square publicly announcing that he had initiated a massive short position in HLF stock.
Ackman called the company a “pyramid scheme” in which the majority of revenues came from distributors of Herbalife products and not consumers.
Soon thereafter, legendary investor Carl Icahn of Ichan Enterprises (IEP) took the other side of the bet, going long Herbalife stock.
What followed has been a public battle of egos, because Icahn’s investment has been seen more as a thumb in Ackman’s eye than in any actual belief in HLF as a company.
Icahn went long when Herbalife stock was trading in the $30s. Ackman went short in the $40s. On Tuesday, HLF closed just around $80. That’s the problem with a massive Herbalife stock short position — it can cause a lot of pain when a deep-pocketed ego-maniacal investment mogul decides to attack.
Now things have gotten worse for Ackman, but much better for Icahn and all Herbalife stock longs. The biggest concern for HLF stock has been potential investigations or enforcement actions by the Federal Trade Commission. If any credence was given to Ackman’s concerns, Herbalife stock might have not just dropped, but cratered. FTC enforcement actions can be brutal.
In fact, the FTC announced last week that it was planning a new initiative against misleading weight-loss product advertisements. Many thought Herbalife was a possible target, along with Nu Skin Enterprises (NUS).
On Tuesday, though, neither company was mentioned in the enforcement action.
Given the longstanding accusations leveled at Herbalife and the very public wrestling match between Ackman and Icahn, I strongly believe that HLF must have been on the FTC’s “to-do list,” if you will, this past year. Although I don’t put much faith in the government to actually dig up corruption and take action (witness the SEC’s failings with Bernie Madoff and Bally Total Fitness), the agency simply had to know about the Herbalife situation.
That’s not to say that Herbalife actually is a pyramid scheme or is doing anything illegal whatsoever. But it is to say that, since the FTC didn’t take action now, I don’t believe it ever will. This would’ve been the time to announce something against HLF … and if there was any wrongdoing, it would’ve earned the FTC great publicity to expose it.
So what does that mean? Well, I think this means Herbalife stock will go even higher. Icahn has a tendency to reap multiples of his investments before selling them, and he’ll keep the pressure on if it means causing pain to Ackman. That’s how much these guys hate each other. I think Ackman will be forced to add HLF to the his list of very public and painful failures — a list that already includes his JCPenney (JCP) and Target (TGT) investments.
Still, it’s difficult to pin down just how investors should play HLF stock. See, I don’t really know about Herbalife, its products, whether Ackman’s assertions have any merit and, if they do, whether or not it matters to investors. Herbalife stock trades on things other than fundamentals … although with about 15% long-term projected growth and a forward P/E of 15, HLF does at least look fairly valued.
With that in mind, I think Herbalife stock is more of a trading vehicle. One way to play it, thanks to its volatility, is to sell naked puts. The February puts, with strikes between 77 and 80 and expiration on both Feb. 7 and Feb. 22, are selling for crazy generous premiums. The Feb 7 $77 put is at $4 as of this writing. That’s a 5% return. And the Feb 22 $80 put is at $6, or 7.5%.
That’s incredible value, and is a great way to play Herbalife stock in the wake of the company’s clean slate.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
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