Herbalife Ltd. (NYSE:HLF) is an Energizer Bunny of a stock that keeps going and going, no matter what the naysayers say. Even so, anyone tempted to buy HLF stock might want to lie down until that feeling goes away. If that doesn’t work, try an adult beverage or a pharmaceutical equivalent. In other words, stay the hell away from this stock.
Let’s set aside the question of Herbalife’s weird history and billionaire Bill Ackman’s unprofitable (so far) short bet against the company for a bit and focus on the stock.
HLF Stock Is a Dangerous Bet
First of all, HLF stock is trading near an all-time high, which is a red flag by itself. With a multiple of 24x, the stock is expensive, considering that analysts are expecting revenue growth of 1.8% this year and a drop in earnings per share from $4.85 to $4.61. Given those depressing metrics, I don’t understand how Wall Street analysts came to the conclusion that HLF stock will hit $85.25 over the next 52 weeks. That just seems bonkers.
Let’s talk about Ackman. The hedge fund tycoon’s Quixotic fight against Herbalife was doomed from the start because there is no official legal standard for what is a pyramid or a Ponzi scheme. It’s kind like trying to define “art” or “pornography,” which are things that people know when they see.
Herbalife is a multilevel marketer (MLM), where people earn money from both sales to consumers and recruiting others to join their sales teams. The MLM model is legal, though it is controversial.
The Federal Trade Commission, though, came down hard on HLF stock. It fined the company a record $200 million, and required it to restructure how it compensated distributors after determining the existing system rewarded them “for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product.” It went on to note that Herbalife caused “substantial economic injury to many of its distributors.”
The reverberations from the FTC settlement are far reaching. Though HLF surpassed the FTC’s standard that 80 percent of its purchases be made by “documented” consumers, the company noted that distributors were having difficulty adjusting to the new world order. Here’s how Herbalife explained the situation when it slashed its guidance earlier this month:
“The Company’s distributors have successfully utilized the full array of new tools and processes necessary to document retail sales transactions. Yet, as is typical with any change, the new technology and processes have taken time for distributors to learn, then teach and implement in their organizations.”
Weirdly, Herbalife reported better-than-expected results and raised guidance a month earlier. Ackman noted that CEO Michael Johnson and other corporate insiders decided to dump their HLF stock and options after the good news. Coincidence? An armada of plaintiffs’ attorneys who are looking at pursuing cases against the MLM don’t seem to think so.
There’s also the mysterious departure of the head of its China business that has yet to be explained. Not surprisingly, short interest in HLF stock has exploded.
Now, I am not going to go as far as Ackman and declare that HLF stock will be worth $0. Indeed, Herbalife and other multilevel marketers have defied naysayers for decades. All I say is that anyone tempted to add this company to their portfolio should find other ways to spend their money.
As of this writing, Jonathan Berr did not own shares of any of the aforementioned securities.