Herbalife: A Battleground Too Bloody

On April 3, 2012, I made a purchase of Herbalife (NYSE:HLF) amongst my other metric based picks, largely on the strong PEG ratio and dividend yield. I had some faint notion of what sort of business HLF was (GNC but a MLM), but did not think too deeply about it. Certainly I was not myself in the market for weight-gain or weight-loss shakes, nor did I have any desire to dig very deeply into the MLM side of the equation. The very most I thought about it was-“People who join Herbalife to sell products would be better off buying the stock and collecting the dividend, at least that’s guaranteed, as much as such a thing exists”. Ah, what innocent times. Things were good for about a month.

Bill Ackman, until October 2011, was one of those well-enough known guys via CNBC and the like that I had a passing knowledge that he existed, and scant memories of his past escapades with Wendy’s International (NASDAQ:WEN), Target Corporation (NYSE:TGT) and Borders Group. It was then announced that Ackman’s Pershing Square Capital Management had been amassing a stake in Canadian Pacific (NYSE:CP) a stock I owned and soon began the almost weekly proxy voting pamphlets sent by CP and PSCM, which I read with great interest each time they arrived. I gave both sides all the ability to sway my mind based on the facts, but after some time, at least by the turn of the New Year, I was convinced that CP was right and PSCM were vultures trying to, for whatever nefarious reason, install E. Hunter Harrison as CEO of CP (despite there being contractual obligations that would otherwise make this impossible).

Then came Bill Ackman’s announcement of the $1Billion short on Herbalife. I could not help but feel a little persecuted by this guy. What is worse is that I know his arguments make perfect sense, and each new presentation including the most recent I have found myself in agreement with almost every single point and example (unlike CP), and still, I wanted to prevail on my investment and most specifically I wanted him to lose. The worst thing in the world you can do is let emotion rule over an investment decision, and I was knowingly breaking this tenant in my stubbornness with HLF. But so was he.

Later, one of my hero’s, Carl Ichan, jumped into the fray, including fireworks I watched live on CNBC, reinforcing my conviction that no matter how much I agreed that HLF was a MLM, they would beat back the clamor by Ackman and his backers for an investigation by the SEC, or if the investigation came, it would clear HLF of all wrong-doing. They would NOT be going to $0 anytime soon. By being stubborn, and patient, I eventually ended up back in the green on the trade, despite all rational evidence that at any minute the whole thing could come crashing down and Ackman prevail over my chosen side, again. The CP affair did not go as intended when in May 2012 the board of CP resigned just prior to the annual meeting, effectively surrendering to PSCM after more than six months of fighting, just to give in literally on the morning of battle. That my CP holdings have far outstripped my CNI holdings in the same period, with almost all the gains coming after the proxy battle, is of little consequence. I did not care for the way that war had been waged, nor the outcome that felt underhanded and unethical.

Looking at my HLF holdings now, I am still just a little bit more than 8% to the positive, but the breakdown since the beginning of August is worrying. The pop that followed Ackman’s failed “Super-Presentation” was short lived, and if anything the bears stay just as convinced as ever that HLF is in deep trouble. Indeed three separate government probes have been opened, with no specific recent findings having been released. HLF continues to plug along with the normal news items, and even positive things like new product launches and large insider buys are having no effect on the downward drift on the share price.

Final Analysis:

Most of the metrics on HLF look strongly within the range that I look for, with a PEG of 0.70, an analyst mean recommendation score of 1.8, even strong numbers on P/E (10), forward P/E (6.3), Price-to-Sales of 0.82 and Price-to-Forward Cash Flow of 8.65. There is no debt on the books, and the quick ratio of 1.20 and current ratio of 1.60 are encouraging. The dividend has been cut to increase buybacks, which is not ideal to my investing strategy for a few reasons. Ultimately their returns on Assets (18.2%), Equity (285%) and Investment (36.8) are eye-popping, but the Book Price-to-share of -4.69 is a major problem, as is the 2% decline in most recent quarter earnings. The problem specifically in the instance of HLF and the B/Sh is that if there is a risk (and I would say significant headline risk) that some action may be taken by the US government (today, tomorrow, or someday soon), then this would be the number shareholders would be most interested in. The fact it is negative gives no confidence whatsoever. The only two things that keep me interested in HLF, beating Ackman and following Ichan, are not the right reasons to continue following a trade that every indication tells me is wrong. Sell. Sell now. HLF is leaving my Widows & Orphans portfolio, never to return.