Despite Surviving Short Attack, Herbalife Ltd. Stock Is Still Overvalued

HLF stock may shrug off bad news, but it still has significant risks

Despite Surviving Short Attack, HLF Stock Is Still Overvalued

Source: Aybek Erkinov via Flickr

Few stocks have caused more controversy in the media then Herbalife Ltd. (NYSE:HLF). Ever since activist hedge fund manager Bill Ackman shorted HLF stock some six years ago, the stock has been the subject of more speculation and confusion than just about any stock I can remember.

Nevertheless, despite an aggressive short-selling campaign that Ackman launched against the company, Herbalife stock never really suffered very much. Much of that was due to some pretty exceptional countermeasures by management, not to mention Ackman’s nemesis, legendary investor Carl Icahn and his Icahn Enterprises LP (NASDAQ:IEP).

Carl Icahn famously went head-to-head with Ackman in a very public, very nasty battle over the Herbalife thesis. Icahn bought stock in very large quantities. Sometimes it may not matter what the truth is about a company, its products, its structure and its earnings. Sometimes it just takes two hedge fund titans to control the market for a given stock.

Personally, I’ve never been able to figure out the true deal with Herbalife or HLF stock. I have no idea if it’s a pyramid scheme, in name or definition or anything else.

Despite the very compelling case presented in the documentary “Betting on Zero,” which I suspect was produced by an Ackman-related entity, the stock went nowhere. Clearly, this was an attempt to give Herbalife the “Blackfish” treatment, the documentary exposé on alleged issues at SeaWorld Entertainment Inc (NYSE:SEAS).

Herbalife and HLF stock have continued to plow ahead. The Federal Trade Commission Consent Order in mid-2016 required the company to refund $200 million to some 350,000 people who lost money trying to run their own Herbalife business, and restructure its operations.

So far, that hasn’t dissuaded HLF stock investors. Perhaps that’s because the big fear was that the FTC would shut down the company completely, and HLF stock has been in one long relief rally ever since.

Journalist and researcher Christine Richard, who wrote a fantastic book regarding Bill Ackman’s prescient call on the mortgage crisis, has been following the Herbalife situation for many years.

She recently pointed out that under the FTC consent order, Herbalife had to change what it calls “documented volume” at nutrition clubs. Specifically, sales to distributors in nutrition clubs may no longer be counted as documented volume. Richard suggests that could impact Herbalife sales numbers going forward.

She may very well be right. There may be any number of ongoing lawsuits against the company, which may or may not impact its operations in the long term.

I’ve seen situations like this before many times. Once a company gets a certain public perception, any number of activists will harass and litigate ad nauseam in order to achieve some kind of satisfaction. This rarely come to fruition, except in the cases of outright fraud. Even then, sometimes companies simply slip through the cracks.

To me, an investment in HLF stock simply needs to be undertaken with the understanding that it probably contains a higher degree of risk than most similar investments. Certainly, the business model has worked for many years. The company reports earnings on May 3, so we’ll see what that looks like.

Amazingly, only four analysts cover the stock, and they have a consensus of a $1.10 per share, on $1.11 billion in revenue.

What we can say is that in the past three years, financials of all been relatively similar. While the company makes between $200 million and $300 million each year, the stock presently trades at 40 times earnings. Strictly on that basis alone, it’s too expensive. Yes, its cash flow is terrific, but it doesn’t pay a dividend.

Bottom Line on HLF Stock

So all other things being equal, I happen to see HLF stock as just being very overpriced with no real growth catalyst going forward. That’s reason enough for me to stay away.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


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