Forgive billionaire hedge-fund manager Bill Ackman if he seems a little more smug than usual these days.
Reports that the FBI and Justice Department are investigating Herbalife (HLF) gave his epically wrong short bet against HLF stock new hope.
Until this morning, anyway.
See, after tumbling hard at the end of last week, HLF stock popped Monday morning. So now, investors are dealing with the prospect that the overhang of a criminal probe will be dogging Herbalife for some time … at the very same time HLF stock is showing some resiliency.
What should you do? Well…
Clash of the Titans
Bill Ackman famously revealed his massive billion-dollar bet against HLF stock in December 2012. Casting himself in the role of do-gooder, Ackman argued that HLF stock is nothing but a bet on a pyramid scheme.
For Ackman’s short of HLF stock to work, he pretty much needed the Federal Trade Commission — or some other federal agency — to shut HLF down. But nothing happened.
Indeed, rival billionaire hedge-fund manager Carl Icahn — who makes no secret of his distaste for Ackman — took a large enough long position in HLF stock to make him the company’s biggest shareholder.
In this clash of the titans, Ackman has been losing, big-time.
True, HLF stock has had a terrible 2014 so far (which is good for Ackman). The Federal Trade Commission announced an investigation into HLF last month, and now there’s news of the criminal probe. But HLF stock is still higher today than it was when Bill Ackman announced his short at the end of 2012:
Sure, Ackman’s short bet might have been pushed into the black momentarily, but he has by no means won yet. HLF stock is down, but it’s hardly out. Witness Monday morning’s rally.
Besides, the probe into Herbalife has been going on for months, according to The Wall Street Journal, and it isn’t clear that any laws have been broken.
Meanwhile, the FTC — should it find anything — can punish the company without shutting it down. A massive fine might hurt HLF stock, but unless it makes it go to zero — Ackman’s goal — the billionaire loses.
Like it or not, HLF is innocent until proven guilty.
What Should You Do With HLF Stock?
Most importantly, the role of the “little guy” (the retail investor) in this saga hasn’t changed. As we advised more than a year ago, just stay away from HLF stock.
Shorting stocks is risky business because there’s no telling how much you could lose. Stock prices don’t have ceilings. At least when you go long, you can’t lose more than your principal.
The HLF stock trade was nothing more than a contest of egos even before the feds got involved. It was a coin toss, with Carl Icahn’s face on one side and Bill Ackman’s on the other.
The FTC, FBI and Justice Department have only added more layers of uncertainty.
A short might look like a slam dunk at this point, but guess what? HLF stock is so heavily shorted that it’s spring-loaded for a short squeeze.
The feds move slowly, and in the interim it wouldn’t take much in the form of good news to send HLF stock soaring. Analysts’ estimates on HLF stock earnings are actually being revised upward, and Herbalife is expected to have a pretty good quarter when it posts results in two weeks.
Even if Herbalife is a goner, the risk of getting squeezed out before its ultimate demise is too great to go anywhere near HLF stock.
Retail investors should enjoy the show but stay far away from HLF stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.