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Herbalife stock is confounding traders and making for a peculiar showdown between the shorts and the longs. As money manager Bill Ackman traded barbs with the company over the legitimacy of its multi-level marketing, Wall Street is at a loss as to who they should believe.
Traders initially shrugged off Ackman's diatribe against Herbalife Ltd. (NYSE: HLF) last week, sending HLF stock up 25.5% on the same day the billionaire hedge fund manager called the company's chief executive officer a "predator" and the company a "criminal enterprise."
But while the activist short seller's latest jab in his almost two-year long offensive against the nutrition marketer didn't deliver an immediate knockout, HLF shares have taken a slow drubbing over the last couple days and are close to forfeiting all the gains they made last week when investors looked to make a fool out of Ackman.
After the initial 25.5% jump, HLF shares began to idle along between $65 and $67 for a couple days before plummeting 13.5% on a weak earnings report. Where analysts expected sales to grow 11.5%, HLF sales only grew 7.1%. Earnings were also down 16.5%, and HLF further fell short of analyst estimates on the earnings-per-share figure.
This was particularly troubling because prior to this earnings season, the nutritional marketer ended a streak of 21 straight quarters beating out analyst expectations, The Wall Street Journal reported, a streak that began in 2008. On this news, HLF shares torpedoed 13.5%.
The stock continued to slump, falling 4.3% and closing yesterday (Wednesday) at $55.83. This is just $1.81 away from last Monday's close of $54.02, the day that Ackman said he was prepared to deliver the "deathblow" to the company in a presentation the day after and shares dropped 11.2%. Pre-market trading pushed shares down even lower, opening this morning at $55.46.
Herbalife Stock Swings Violently as the Showdown Heats Up
Herbalife stock has been a top target in Wall Street's focus for months.
"A lot of traders got into the stock as it was rising from the low $50s back in March and April, believing there was something going on behind the scenes," said Money Morning Capital Wave Strategist Shah Gilani. "Then, on July 21, the stock dropped like a stone, and lot of long-holders jumped out."
But the plot thickened during Ackman's presentation last week in New York at the AXA Equitable Center.
"In his face, as he was speaking, the stock shot up 25% to more than $67," Gilani said. "That's crazy."
HLF is a multi-level marketing company that allows customers to become distributors of their products. To become a member, one has to seek out sponsorship by an existing member and purchase what the company calls an "international business pack," which is essentially a starter kit that offers new members product samples, promotional and training materials, and outlines compensation plans.
Members are then given the opportunity to purchase products at wholesale prices for their own personal use, or to sell them at a retail premium and make an income. There are also opportunities to make more money by recruiting additional members. HLF has more than 500,000 members in the U.S. and 3.9 million worldwide.
This structure of network marketing is what has Ackman particularly wary of the diet shake vendor. He sees this sales structure as a "pyramid scheme," that oftentimes lures those of lower income into memberships with wild promises of making a full-time income. His campaign against the company alleges that of these members, 88% make no money, and 96% make less than the minimum wage.
Ackman has said the shares are worthless, and has been lobbying for the Federal Trade Commission to launch investigations into the company's business practices. In March, the FTC opened up a probe.
But this showdown is not between just Ackman and HLF. It has extended to Wall Street and became a battle between long buyers and short sellers.
Not long after Ackman's initial announcement, billionaire money manager Carl Icahn derided Ackman's public battle with HLF.
Icahn, along with a team of noted investors that included William Stiritz and George Soros, took the other side of the trade in the face of Ackman's accusations, pushing shares up and forcing Ackman to swallow up to $500 million in losses on the short come this past November.
The last week and a half has seen HLF stock tumble, only to eventually rise precipitously, and then once again slide. It has been a continued struggle among traders, and while the short sellers currently have the upper-hand, this wild volatility makes the showdown over HLF's stock anybody's game.
"Herbalife is a crazy trading stock and it just as easily could climb back up to above $65 to $67," Gilani said.
More from Shah Gilani: U.S. student loan debt has become astronomical, with the outstanding tab above $1.2 trillion. But now, the big banks are urging students to apply for credit and load up on even more debt, adding another component to the gargantuan student debt scam...