Referenced throughout the article is Bill Ackman's post Robin Hood Bloomberg TV Interview, which is available here. His slide presentation from the RH conference, "Robin Hood in Reverse" is available here.
Herbalife Longs, Don't Be Fooled
Man, it's really looking good for Herbalife (HLF), isn't it? The stock has run like a bat out of hell over the last year, up 114% in the last twelve months alone. Herbalife bulls have been rubbing it in the faces of shorts and bears alike, including Bill Ackman, all of whom have taken losses on paper - in the short term, at least.
Bulls have never been more confident, but bears - like myself, SA contributor Matt Stewart, and of course Bill Ackman, remain resolute and calmly confident in the stance we've taken against Herbalife. What possible reason could there be for that? Are we the three stupidest people in history?
Don't answer that.
I continue to believe that Herbalife could be another win of MBIA proportions for Ackman and the bears who follow him. I've been able to draw several similarities between the two situations and gather tons of new information on Ackman's case over the last week.
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It seems like everybody in the world thought Bill Ackman's Robin Hood conference speech under-delivered, including the market. My last article, "Bill Ackman Will Swiftly Drop the Firm Hammer of Justice Against Herbalife on Friday" could have actually been named, "Ackman Remains Cool, Calm, and Collected as He Quietly and Politely Reaffirms His Bearish Herbalife Case."
Ackman's presentation, now available on FactsAboutHerbalife.com, actually had some great new information and video; but it's a couple of things that Ackman noted in his post-presentation interview that should really draw some concern for Herbalife longs. I'll get into them in a bit.
There was a little worry going into Friday of last week, as the stock initially dipped to $66 and change, but by the time Ackman's speech was over, the stock was screaming to all-time highs. I finally got a chance to go in through the slides today and re-watch Ackman's post presentation Bloomberg interview - about ten times - and I've never been more confident that Ackman is on the right path here.
"Time is the friend of the wonderful business, the enemy of the mediocre."-Warren Buffett, 1989 Letter to Shareholders
Let's get something else out of the way right up front, too. I continue to hear Herbalife longs making the argument that while Herbalife sits at $72 and Bill Ackman's position is namely through puts, that there's a chance of a short squeeze. They're right; as with any stock, there's always a chance of a squeeze. Is it the squeeze of epic proportions people are alluding to due to Ackman's position? No.
The anatomy of this simply doesn't work - you can't squeeze someone out of a put position, they need to be short shares of the underlying equity. Let's just clear that up.
"The best opportunities are the ones which are contrarian."-Bill Ackman, recent Bloomberg TV Interview
Secondly, I wanted to address a couple of items that Ackman once again brought up in his Robin Hood conference presentation and in his subsequent half hour interview with Bloomberg TV.
The first thing that Ackman noted during his post-presentation interview is that he's happy with his due diligence despite the stock price.
"Sure," bulls will argue, "what a bunch of BS."
But, that couldn't be further from the truth; real investors separate the company from the stock. Ackman, like a chess player who knows he's just several moves from checkmate, remains content and modest - he's focused not on the stock being up over 100%, not on what his paper losses are, but the business model itself, and why it's bound to eventually fail.
In the interview, he not only acknowledged that he's up against some of the bigger guys on Wall Street, but that he welcomes it. Surely crazy ole' Bill has lost his mind, right? He claimed that having other whales in the stock "attracts regulator attention."
Ackman has beaten around the bush a little, but you can clearly put the pieces together that he's expecting regulator attention to be the straw that breaks the Herbalife camel's back. It could take years for Herbalife to implode on its own, and regulator attention is what Ackman feels is going to catalyze these events.
It's also extremely important to note that the SEC inquiry into the company that was launched in January of this year continues to push forward. Government and regulators do tend to work very slow and take their time through these types of things, but every day that goes by without resolution is another day with an open regulator inquiry. The bigger and more complex the company is, the longer the regulatory investigation is going to take.
Ackman Drops an Enormous Regulatory Hint
Another major hint from Ackman came in his Bloomberg interview after the conference. He didn't get into the details of what agencies were looking at what, but he did say two things, that when read one after the other with an eye on logic, seem to point out that something relatively detrimental is going on behind the scenes between Herbalife and regulators.
1. Ackman said that he's been working weekly, if not daily, with regulators - supplying them with information and keeping the lines of communication open.
2. Knowing that, Ackman then goes on to say that he believes there's regulator actions of a material nature that the company is choosing not to disclose - this is enormous.
3. Using the logical succession of those two statements, and Ackman continuing to confidently back his position on live national television, I'm more than confident that there are things going on in the background at Herbalife that common shareholders are not being let in on.
Continued Hiding of Facts and General Operational Confusion
How has the company responded to Ackman's original thesis?
For a litmus test, let's take a look at one of the primary questions plaguing Herbalife, and look at yet another example of confusion and disarray with regards to some rather important business metrics.
One of the biggest questions with regards to whether or not Herbalife is a pyramid scheme is the amount of product that is sold to its distributors vs. retail customers. Clearly, if the product is all being bought internally, it's a huge nod towards Herbalife being a pyramid scheme. So, the company likely has a rock solid answer for this, right?
Wrong.
You can say whatever you'd like about Ackman, but two things are for certain.
1. He's done insane amounts of due diligence.
2. He's caught Herbalife in numerous "misstatements."
Let's see what the company has publicly said with regards to these metrics.
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Alright, so the company - which prides itself on governing distributor vs. retail sales through its 70% rule, doesn't really seem to have a number as to how much product is sold to either.
As Ackman pointed out in his presentation, companies like Tupperware have extremely firm grasps on these numbers with Tupperware's COO reporting them to management weekly. Herbalife, however, not only doesn't have the data, but seems to be dancing around a finite answer for the company with regards to this question.
Somebody in IR at Herbalife needs to work with counsel to at least come up with the appearance of having an answer for this question, so they can all be on the same, confused page.
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Additionally, this was again another point of contention after Ackman made his first presentation. CEO Michael Johnson, sounding like he had a couple too many of Herbalife's "Lift Off" energy pills, furiously answered questions with CNBC in regards to this issue, sounding half annoyed and half like he just got done playing a game of full court basketball.
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But, then he comes out to say that 90% of distributors are buying their own product? that's almost the inverse of what he said in his first interview. Which one is it?
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This is just one, of many examples, of confusion and general sloppiness with the company's message.
Another Day Without Audited Financials
Every day that goes by is another day without audited financial statements. Here's what we know about the state of Herbalife's financials, as presented by WSJ Online:
In his remarks during the Bloomberg interview, Mr. Ackman cited the absence of re-audited financials as evidence of questionable accounting at Herbalife.Herbalife's ongoing re-audit of its financials is a consequence of the insider-trading scandal at KPMG revealed earlier this spring. Mr. Ackman said that the process was taking too long and should have been completed by this past September, citing an analyst forecast by D.A. Davidson & Co's Tim Ramey.Mr. Ramey wrote in an analyst report dated Sept. 5 that "We believe the company will have audited financials in place this month." In an interview Friday, Mr. Ramey said he was referring to audits of Herbalife's latest financials, but not the completion of the re-audit for the fiscal years 2010 through 2012, which were compromised by the KPMG scandal.Herbalife retained the firm PricewaterhouseCoopers to handle the re-audit as well as the audit of its financials through the end of the fiscal year. Chief financial officer John DeSimone said in the company's earnings call last month that Herbalife expects the re-audit process to be completed by the end of the year, but made no guarantees.
Ackman sees the lack of financials as the first potential coming catalyst for his short thesis. He also sees it as a deterrent from investing in the company, questioning how anyone can proudly boast about investing in a company without audited financials.
Clearly, Ackman thinks that the lack of having the financials finished by now is a nod towards improper accounting. One thing is for sure, I'm positive that Pershing Square has been in the ear of PwC as they are well under the microscope conducting this audit.
The LBO Farce
Catalyzing the stock earlier in the week of the Robin Hood conference was leveraged buyout "rumors" about Herbalife. I asked in a previous article about who in their right mind would even front the equity necessary for a LBO.
If somebody did, I'm not quite sure I could find a better debt to bet against than that. Ackman seems to feel the same way, based on comments he made during his Bloomberg interview. As I commented in a Tweet earlier last week I wonder how much smart money exited on the highs of rumors with absolutely zero substance. Is market manipulation only something that short sellers get blamed for?
Finally, you can't have an LBO without audited financials, so that puts the kibosh on anything happening with this "rumor" anytime soon.
You're going to need to borrow roughly $9 billion to buy out the company from shareholders at any type of premium. What lender is going to be willing to put up this type of money for a company under this much scrutiny?
This Trade Could Mark A Billionaire Sea Change From Old Money to New Money
"If the company goes private and we are forced out, we will replace our position with credit default swaps and keep going."-Bill Ackman, on Bloomberg TV
You have to remember that the best in every industry, no matter what it is, are at some point replaced. Sometimes, it's ceremonious, like the turning over of quarterback passing records in football, or when one hall of famer inducts another into the NFL hall of fame.
Sometimes, it isn't ceremonious, like when Leno's timeslot was replaced by Conan O'Brien.
But, hey, that's Darwinism. And we could very well be witnessing a sea change of massive proportions about to take place here.
What we have here is one 48-year-old hedge fund manager in the fight of his life with the three pictured below, worth tens of billions and weighing in at a combined age total of over 1,000.
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Sometimes, not unlike the original aristocrat, C. Montgomery Burns from the Simpsons, guys that have had success their whole lives are less interested in the ethics behind a situation and more interested in simply crushing those who have the moxie to stand up to them. This could very well be a case study in that, and then, the psychological effects of the underdog eventually winning.
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One thing you can say about Ackman over all of 2013 and into the Robin Hood conference/interview is that he's kept his head. As a matter of fact, that seems to be one of the things that Carl Icahn hates the most about him. During their original CNBC interview, Icahn alluded to a statement similar to, "no one is more sure of Bill Ackman than Bill Ackman." I don't know about Bill, but I'd take this as a compliment.
Ackman, despite what the bulls will tell you, has really always conducted himself in a classy and respectable manner during interviews and when presenting his case. He's persistent and calm, and rope-a-dopes you over and over with this case.
Ackman was even noted for, against the advice of his lawyer, volunteering much more information than necessary while he was being interrogated by the attorney general and SEC over the MBIA case. He wants you to hear his case - he feels if he can just get the sun to shine on his case, the people will eventually come to the right conclusion. And, I happen to agree with him. His first step was in late 2012, when he finally introduced his case to the world on Herbalife. Now, it's had some time to stew - and stirring the pot is the regulatory agencies and the general public's skeptical eye on the company.
This is because Ackman knows how to separate emotion from his trades, one of my other cardinal rules of investing.
Emotion is what prevents real success for many novice traders. Emotion is the catalyst behind making trades that make no sense on paper. Emotion is why people sell off positions after the crash and why they begin buying at the tail end of rallies. Emotion makes idiotic things run through your head, like:
"This stock may never stop going up! Better get in no matter what cost!"
And conversely:
"This company is doomed! We are going to zero right here, right now, on this crash!"
This may seem like idiocy when you read it now, but even the savvy investors know this voice still comes out in their head when they're in the midst of a rally or crash. Ackman is showing a great example how to ride out emotional situations with resolve and class over 2013 and into 2014.
By bringing attention to Herbalife, he's doing two things - aside from handing regulators everything they could possibly want on a silver platter, he's forewarning potential Herbalife distributors for what they're in for. It's a legal, ethical, two-pronged effect to make his point. And, I'm convinced his point will be made.
Remember the original CNBC interview with Icahn? Ackman was cool and collected, while Icahn sounded like the maniac; screaming, cursing on live television, interrupting, and generally making himself look like a whiner.
Herbalife Could Damn Well Be the Next MBIA
Remember, it took Ackman 7 years to cash in on his due diligence with MBIA. Herbalife might not be any different, even though he (and other shorts) have taken paper losses already.
"This is not a trade for me. We're going to take this to the end of the earth."-Bill Ackman, on Bloomberg TV
Not unlike MBIA, Herbalife is up since Ackman has announced his criticism. Remember, too, that MBIA went from $50 to $75 - on its way to under $5.
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"The real key to making money in stocks is not to get scared out of them"-Peter Lynch
To conclude why I think Herbalife could be following down the MBIA road, here's a summary of points that help me reaffirm my bearish sentiment and suggestion that there's possibility for total loss with Herbalife:
1. The stock is an appetizing short at all-time highs.
2. There has been an enormous hint dropped about undisclosed regulatory action going on in the background.
3. Herbalife continues to not be able to provide information on distributors vs. retail purchases of its products.
4. There are no audited financials.
5. There's no chance of an LBO anytime soon.
6. Icahn, I predict, will soon show his hand by ducking out of Herbalife with his profit. I continue to believe he's in this for a trade, not for the long term.
7. As MBIA proved, for Ackman, it's always darkest right before dawn.
Best of luck to all investors here.
By Quoth the Raven
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