Herbalife Ltd. (NYSE:HLF) stock has been one of the most controversial names in the stock market for multiple years running now. For those of us who love drama, it has been quite a show.
But like every show, it’s gotta come to an end eventually.
An exclusive report from The New York Post today comes bearing bad news for the drama-lovers: The nutritional products company has reached a settlement with the Federal Trade Commission over whether it was a pyramid scheme or not, according to the Post‘s sources.
However — and this is the big news that sent HLF stock soaring after the report — a source says Herbalife will not be forced to make material changes to its business model.
What does this all mean?
Well, while there’s certainly reason for caution on a trade like this, it bodes really, really well for HLF stock owners. At the time this article was written, they were already seeing the benefits, with shares up more than 5%.
HLF Stock: Will Ackman Unwind His Short?
Billionaire hedge fund manager Bill Ackman made a huge fuss in late 2012 when he announced a $1 billion short bet against HLF stock, claiming he would ride it all the way to zero, and that the sales methodology amounted to a massive pyramid scheme.
The market took Ackman — who didn’t become a billionaire by twiddling his thumbs — seriously. HLF stock cratered on Ackman’s bet, losing 38% in a single day and falling from around $44 down to roughly $27.
But as it turns out, the market gave Ackman too much credit. The stock has not closed lower than that level since then, and Herbalife shares have actually more than doubled, now trading above $62.
Today’s New York Post piece is overwhelmingly bullish for Herbalife because, although its sources say there could be a substantial fine paid to the FTC, the fact that regulators don’t see a systemic issue with Herbalife’s business model would mean that Ackman’s thesis on HLF stock is fundamentally flawed.
Sooner or later, he’d be forced to cover his short position, buying back the shares he borrowed and sold, driving prices even higher. According to ShortSqueeze.com, more than 35% of Herbalife shares are sold short, and it would take 18 trading days — nearly a full month — for all the shorts to cover their positions (assuming average recent trading volume).
You’d think that this might make HLF stock gain a little more than 5%, and you’d probably be right. But there are conflicting reports about how imminent this alleged settlement is with the FTC. A source referenced by the Post said the announcement could come as soon as Tuesday, but CNBC spoke with another inside source that said there could be a deal eventually but that a Tuesday announcement was unlikely.
It’s always tricky trading unconfirmed rumors, and with conflicting reports right now it’s tough to say how this’ll play out.
But given the horrible year that Ackman has had — Valeant Pharmaceuticals Intl Inc‘s (VRX) epic meltdown being the most costly mistake — it would only be fitting that the Herbalife trade would come back to cost him, too.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
