Herbalife: The Day After

It’s been a wild week for Herbalife (HLF), a week that started with massive selling, continued with even more massive buying yesterday and less-massive selling today.

Bloomberg

On Monday, Pershing Squares’ Bill Ackman claimed he would “expose incredible fraud” at Herbalife, causing its shares to drop 11%. Yesterday, Ackman spent three-and-a-half hours laying out his case against the multi-level marketer, one which the market found less than convincing, as Herbalife’s shares surged 25%. Today, they’ve dropped 3.5% to $65.40 at 2:07 p.m.

At least one investor is feeling better about his short in Herbalife, despite the massive run up yesterday: Kase Capital Management’s Whitney Tilson. The Wall Street Journal has the details:

Whitney Tilson, founder and managing partner of Kase Capital Management, said the substance behind Mr. Ackman of Pershing Square Capital Management's 3 1/2 hour presentation trying to prove Herbalife is a fraud and a pyramid scheme was on point.

In order to bet against, or short, Herbalife, Mr. Tilson said an investor has to believe two things: The majority of the company's operations are a pyramid scheme and regulators will act to either shut down the company or enforce significant action against it.

"On these two measures, I have more confidence in this investment now than I did before his presentation," Mr. Tilson wrote in an email late Tuesday.

Since Ackman first made his short-call on Dec. 19, 2012, shares of Herbalife have jumped 54%. But it pays to remember that the Herbalife first got attention back in May of that year, when Greenlight Capital’s David Einhorn asked some pointed questions on an earnings call, and was later revealed to be short. Since then, shares of Herbalife have dropped 7%. Timing is everything.

Barron’s Bill Alpert made his own case against Herbalife on May 12, 2012, and included Nu Skin (NUS), which uses a similar business model. It’s a must read for anyone who wants a skeptical view of Herbalife without the fireworks that come when prominent hedge-fund managers go head to head.