If you’re an owner of Herbalife stock, you can rest easy. Bill Ackman wasn’t even close.
Well, Tuesday’s presentation came and went with investors voting overwhelmingly in favor of Herbalife stock — it gained 26% Tuesday, closing at its highest level in six months — putting to rest any talk that the multi-level marketing company was in jeopardy of collapsing.
Heading into Bill Ackman’s presentation, the stakes were huge. The hedge fund manager bet $1 billion in 2012 against HLF stock. His disposition heading into Tuesday’s presentation was confidence bordering on cockiness. Herbalife CEO Michael Johnson stuck to heavily scripted press releases outlining the benefits of Herbalife’s community-based approach to health and wellness.
So, without spending a lot of time examining the minutiae of Bill Ackman’s presentation, let’s examine the highlight’s of Tuesday’s extravaganza:
- Bill Ackman will never be confused for a great orator like John Kennedy or Ronald Reagan and he’s definitely not the life of the party, but you have to give him credit for trying to articulate the unscrupulous nature of Herbalife’s business model.
- The presentation once again puts the spotlight on an industry that’s suffered almost as much bad publicity as cigarette companies. Anyone involved in direct selling should be appalled by Ackman’s presentation and the black eye it gives the industry as a whole.
- Ackman pointed out Herbalife’s flouting of labor laws in this country (Ackman believes it uses free labor at its nutrition clubs) along with false and/or misleading income claims. It’s shameful, and yet Bill Stiritz — one of the best CEOs in corporate America — owns 7.4% of Herbalife stock, the third-largest shareholder behind only Carl Icahn and Fidelity.
- Nutrition clubs, which account for almost 50% of Herbalife’s revenue (about $2.5 billion), are nothing more than a front for a faulty business model that’s all about recruiting people that are generally low-income in nature and that have little to do with actual retail sales. There are few retail customers at these clubs, and most of those are invited friends and family who are consuming shakes as part of the qualification process to become a distributor.
- Bill Ackman’s staff investigated 10 nutrition clubs in Queens, N.Y., and found that the average club lost $12,000 per year before the owner’s compensation. Hardly the foundation on which to build a thriving business.
- Bill Ackman reminded investors that if recruiting wasn’t part of the business model, up to half of Herbalife’s revenues wouldn’t exist, and as a result it would be losing money in 2014 instead of making an estimated $6.30 per share.
- Several government agencies including the Federal Trade Commission, Securities and Exchange Commission and U.S. Department of Justice are currently investigating Herbalife, though none appear ready to lay charges any time soon.
While the research Bill Ackman has undertaken is first-rate (he says Pershing Square spent $50 million), the way in which he presented it was dull as dishwater. It was too darn long, bordering on four hours with the Q&A. Given the length, it’s hard to imagine any other outcome but a win for Herbalife stock — despite the actual content having some merit.
The problem for Ackman is that MLM companies have been under the microscope forever, and little has changed on the legal front. He can make the case that nutrition clubs are a sham (I believe is argument is a good one), but until the feds get involved and press charges, it doesn’t appear that anything he does is going to make a bit of difference.
But that doesn’t mean Bill Ackman is wrong.
Sure, he hasn’t landed the knockout punch to immediately collapse the price of Herbalife stock, but he has raised enough questions to keep the FTC and others searching for a smoking gun.
Herbalife’s 26% jump in its share price must be a real head scratcher for the veteran investor. People are buying Herbalife stock like crazy despite the fact half its revenue could be nothing but an illusion. In the days and weeks ahead, we’ll find out if there’s any truth to his accusations.
But right now, the Herbalife longs must be feeling healthy, wealthy and wise.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.