Herbalife - MLM or ponzi scheme?

If you google for "Hedge fund porn", a few of these Herbalife article is likely to come up to the top of your search result, I just tried. It's up more 45% (@36) since the low post Ackman attack ($24.5) since last week but it's still below the traded price pre-attack.

You can get a quick summary of this hedge fund porn in this cnn article.

It's a corporate showdown likened to the Stalingrad battle.

SHORT SIDE

On the one side, you've got Bill Ackman who in his 3.5 hours presentation on 20th December laid out his short thesis on Herbalife. He even set up a website with his facts about Herbalife. Central to his thesis is that Herbalife is a illegal ponzi scheme and is publicly betting that the stock will fall to zero.

He has shorted more than 20 millions of Herbalife's stock - that's approximately 20% of Herbalife's outstanding shares.

LONG SIDE

On the long side, you've got HLF's management itself coming out swinging denying Ackman's claim. The legitimacy of the MLM model aside, they've yet to use $950 million of its authorised $1 billion buyback program due to trading restriction in current blackout period. It's got a market cap of approximately $4 billion.

Chapman Capital has since the short announcement made HLF their biggest long position staking a 35% stake of their fund. Their well structured a relatively concise rebuttal of Ackman's short thesis can be found here. 

Bronte Capital - a relative lightweight in hedgefund world also came out in support of HLF here.

Conclusion

You've got 2 diverging point of opinion and an attractively valued company. There's a lot of fear priced into the current price of HLF @ $36. Analyst are giving targets of $72 for HLF based on normalised valuation, the stock will trade pass $45 once the fear factor blows over I reckon. 

It's got strong cashflow, internationalised earning and growing profitability. I seen them growing in Malaysia and do know of people consuming their product religiously.

If the government don't shut them down due to illegality - they should be easily worth a lot more. HLF's management is due to give their own rebuttal on 10th January 2013. I will be watching closely.