Is Herbalife Nearing Its Death?

With shares of Herbalife (NYSE:HLF) trading at around $24.79, is HLF an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

One of the best battles of 2012 is taking place at the end of the year, which makes it seem like a main event. Herbalife has had a nice run over the past few years, but those years will likely end up being remembered as glory days. In other words, they won’t happen again.

The battle is Bill Ackman of Persuing Capital Management vs. CEO Michael Johnson of Herbalife. Of course, there are many other people in play, but these are the leaders. Bill Ackman is shorting the stock and feels as though it will eventually go to $0. During his three-hour short presentation, he referred to Herbalife’s business as an unsustainable pyramid scheme. He also stated that Herbalife doesn’t offer any substance to justify growth. What makes this especially interesting is that Ackman has a bigger short position on Herbalife than he has on any other company. Therefore, he’s highly confident. Considering Ackman’s record, this should make longs nervous. Ackman isn’t the only short on board. It’s rumored that Jim Chanos and David Einhorn might also be shorting Herbalife.

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CEO Michael Johnson referred to Ackman’s attack as blatant market manipulation. He also wants the SEC to investigate. His best approach probably would have been to pay little attention to the news as though it was a gnat on his shoulder. By acting so defensively, it seems as though he’s attempting to hide something. However, this is just speculation, not fact. What we do know as a fact is that Michael Johnson is currently one of the highest paid CEOs in the country. He made $89 million last year. If Herbalife really is a pyramid scheme, then this makes sense. The man at the top of the period is going to make a fortune. If this is indeed a pyramid scheme, then shareholders have been used as pawns.  

If Ackman is wrong, then considering Herbalife traded at $73 earlier this year, this would be the buying opportunity of a lifetime. At least that would be the case for most people. If you’re not sure, then it would be wise to stay on the sidelines. It’s never a good idea to catch a falling knife. It should be noted that Timothy Ramey, analyst at D.A. Davidson and Co., is siding with Herbalife and is calling for a $72 price target. He is a brave man. He’s not the only analyst on the buy side, though. Many analysts weren’t sold on Ackman’s presentation.

Let’s take a look at some numbers for Herbalife.