Herbalife - update 2

From my initial blog on Dec 28th, the price of HLF went up from approximately USD28.5 to close about USD 46 yesterday. That's a gain of approximately 60% in 17 days.

Although I feel that the company is fundamentally strong, the valuation have bounced back from pre-ackman presentation level.

I will try to lock in some of my gain in the next couple of days..

Herbalife - update 1

Herbalife popped to almost USD 42 (9%?) before settling back below $40s after Dan Loeb (another Hedge Funder) join this epic showdown of titans with his 8% acquisition of HLF.

Today's herbalife trading chart

• Dan Loeb's fund was one of the best performer in 2012 (Ackman's will be in a loss position after fees).
• Loeb made a successful bet on the Greeks bond market & shaped up the management team at Yahoo in 2012 (Ackman made an awful bet with JC Penney)

Loeb's fund took a 8% passive stake (cf. Ackman's 20% active short) in HLF. His reputation is stellar compared to Ackman's. While I've mentioned the other 2 hedgefund invested are relatively nobody compared to Ackman. In this case, Ackman is the relative nobody compared to Loeb.

I like the fundamental (approx. 12% FCF yield) of this company, the share tanked following Ackman's presentation - but it has increased 65% since it bottomed out @ approx $24. I don't believe it is a Ponzi scheme, I believe valuation should normalised after this battle is over.

In this long vs short battlefield, someone is going to get hurt real bad.

Currently it is trading at

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.

Trader vs Investor

Trading
Pardon my ignorance, but I've never fully understood technical trading. To me, they seem to be arbitrary lines on graph that claim to represent resistance and support to price. Some people also believe the way tea leave falls in the glass can have predictive effect to our future.


However, when enough traders subscribe to the same belief on technical trading, it can create a self-sustaining truth. (if enough traders believe that by breaching the "resistance level" - the stock will head to a higher high and similarly, by breaching the "support level", the stock is likely to fall further)

Contrast to investing
All being equal, when the price of stock falls, it should be a better time to buy. After all, the purchase of shares in company represent a fractional ownership of a business.

Common sense will suggest that it's better to buy low sell high.

I believe traders will suggest to sell low buy high - awfully confusing.

So?
The follower of Benjamin Graham often pointed out with much more experience often point out that "in the short term, the market is a voting machine but in the long term it is a weighing machine.

Mr. Market

In the short run, the market is a voting machine. But in the long run, 

it is a weighing machine.

In my short investment life, I've learned not to fight the momentum of the market trader. Ignoring the direction of the momentum is often perilous to my bottom line. When the price of my favourite share is crashing for no apparent (or valid) reason I often have to sit back and reevaluate my fundamental analysis of the company. Emotions (panic!) and greed is dangerous. Accumulation of stock on its downward run is akin to catching a falling knife, it must be done with care.

Theoretically, adding small position once the stock bottom out, taking into consideration the risk/reward analysis of the potential downside/upside of the counter will be profitable. But the problem is, without the benefit of hindsight, it's tough spotting the bottom!

In Malaysia, volatility in the short term is often attributed to "news", "rumours" or "gossip".  I've already paid my school fees for the mistake I made in following the hot tip of the week. It is illegal, and market manipulators are just like the snatch thief on the street and should be punished to the full extent of the law. However, like other enforcement mechanism in Malaysia, our lovely regulators are usually asleep.

More excitement on trading can be found outside our border. Wild swing in prices is less likely be due to manipulation of a small group of individual but more likely due to difference in outlook by different market participant can lead to highly volatile prices. Even the smartest of the wall street titan can be wrong. And when they do get it wrong it can be profitable to be right!

I recently began following the counter of HLF listed on NYSE. The price fell from a 52 weeks high of 73 to the current price of 27. Almost USD20 of the fall was in the past week alone! This was due to the famous short selling of one Bill Ackman, claiming the HLF is a pyramid scheme and it should be worth a big fat 0 as it is as illegal as Madoff's ponzi scheme. I don't think it's worth 0. As such I think there may be situational bet on this stock as part of my "gambling" portfolio. The company has something like USD 1 billion in approved buyback yet to be utilised (Market Cap USD 3 B), generate steady and increasing cashflow and will hold an investor briefing to respond to the allegation. This share will be worth a lot less if Ackman is right, and alot more if Ackman if wrong. The answer is somewhere in the middle I would guess. As you can gather, I am amply excited about the volatility in this counter. I am going long!

Share market is a zero-sum game. For there to be a winner, there must be a loser. It's never fun to be the loser. Invest in what you understand better than the rest of the market, this way, you are more likely to have an advantage in this blood-sport.