Amazingly, some investors have bet against Bill Ackman, the hedge fund manager of Pershing Square Capital Management, in his aggressive stand against Herbalife Ltd. – a company that sells nutritional supplements through a network of independent distributors, who in turn recruit new distributors.
Why is this so amazing? Largely because Mr. Ackman – an investor never short on hubris – has turned his confidence level up to 11 on this one. He believes that the share price will fall to zero, based on his allegation that Herbalife is a pyramid scheme that will be declared illegal and shut down by the Federal Trade Commission.'
And he is backing this opinion with lots of money, reportedly short-selling more than $1-billion (U.S.) worth of the company's shares.
"This is the highest conviction I have ever had about any investment I have ever made, full stop," he said in an interview on Bloomberg Television last month.
The presentation he delivered on his investment thesis in mid-December lasted three-and-a-half hours and consisted of more than 300 slides.
Mr. Ackman might not be alone in his bad feelings on Herbalife. Hedge Fund manager David Einhorn of Greenlight Capital asked skeptical questions about Herbalife during a conference call in May, sending the stock into a 20-per-cent tailspin as investors bet that he might be thinking about shorting the stock.
Still, to get to Mr. Ackman's zero target, Herbalife – which has been operating for 32 years – has some distance to fall. Even after a tumultuous 2012, during which the stock fell as much as 64 per cent from its high, the shares trade at more than $36, giving the company a market capitalization of about $4-billion.
What's more, the shares have been showing some life since hitting a near-term low on Christmas Eve. In the six trading days since then, the price has rebounded an eye-popping 39 per cent amid very high trading volume.
For what it's worth, analysts are sticking by the company. Among the 10 analysts following the stock, nine recommend it as a "buy." According to Bloomberg, the average price target is nearly $80, implying a 12-month gain of more than 120 per cent.
But what's particularly interesting is that some investors have bought Herbalife shares with the view that while Mr. Ackman's argument against the stock is persuasive, his conclusion is wrong.
John Hempton of Bronte Capital, and a blogger with a rich history of attacking fraudulent companies, said he bought shares on Christmas Eve: "I suspect that Herbalife is so profitable and so powerful they will see Mr. Ackman's attack off – and the easiest way to do that is to buy back stock (and make the stock go up). Mr. Ackman has given them the incentive to return their huge (but tainted) profits to shareholders (and I plan to be a recipient shareholder)."
Kid Dynamite believes that Mr. Ackman's pyramid-scheme accusations are unlikely to go anywhere, which is why he recently bought Herbalife shares as a short-term trade: "It's far from black and white that Ackman's altering of definitions and revenue assignments is correct, and unlike a typical pyramid scheme, Herbalife has a product which is sold and consumed," he said.
Bob Chapman of Chapman Capital (via Kid Dynamite) has also taken a "long" position on Herbalife, essentially arguing that the FTC isn't going to get involved with few customer complaints and a decades-long history of operations by the company. As well, Herbalife is expected to address Mr. Ackman's accusations in detail next week.
"I expect it will blow away the skeptics with a point-by-point dissection of Ackman's claims," Mr. Chapman said. "Ackman took his shot; now it is Herbalife's turn."
The part that everyone can agree on? Regardless of who wins this battle, the next few weeks are going to be very entertaining.
David Berman