The news this past week was that someone <cough><cough> was rolling over an enormous amount of Herbalife puts from January 2015 to January 2016. Which means that someone <cough><cough> still thinks they’re right about Herbalife; but thinks the government needs more time.
CNBC’s Dan Nathan did a kick ass job of pointing this out on his blog, Risk Reversal. He noted:
Well, around noon today, the trader rolled the Jan15 50 puts out to the Jan16 50 puts, selling 28,000 of the Jan15 50 puts at $8.05, and buying 32,200 of the Jan16 50 puts for $15.55. It looks like Bill Ackman is on the move again, paying an additional $7.50 in premium to roll the short HLF view out to Jan16.
What’s interesting about this trade is that the Jan15 50 puts were bought back in January 2014 at $7.10 and $7.25 when HLF was still in the 70′s. Today, HLF is around $50, and the put has only appreciated around $1.00 as a result of time decay. Moreover, the cost to roll the put position out to Jan16 means an additional $7.50 in premium, and since there was not much of a gain on the Jan15 50 put, the total premium at risk for the trader is nearly $15 for the Jan16 50 put. In other words, the break-even for the entire trade from initiation in January 2014 is currently around $35 for the Jan16 50 puts that were opened today.
Add to that the fact that the trade position is now bigger today than it was on a premium basis 6 months ago, and you could argue that Ackman is actually increasing the size of his bet. While he has given himself one extra year, he also has doubled the total potential loss if HLF rallies or remains above $50 by January 2016 expiration. Some who would argue that that’s a sign that regulators like the FTC might be taking longer than Ackman had hoped in investigating Herbalife. Whatever the reasoning, it’s quite surprising to see a put trade that only offers 2.33 to 1 upside if the company goes all the way to 0 ($35 potential gain vs. $15 potential loss). That is an indication that Bill Ackman is betting on the stock to go to 0 due to regulatory action. He is not in this trade for a decline to $25.
I knew I was going to get along fine with Dan the day on Fast Money when he referred to Herbalife’s executives as “geniuses” for implementing a stock buyback via looting the balance sheet of all of its equity months before the company’s first earnings miss in years. Play on, Dan. Play on.
There was never a time where I doubted Mr. Ackman’s convictions from the get go – even while others like Stephanie Ruhle on Bloomberg, after saying to Ackman, “you could go bankrupt!” (he’s up 30% this year – nice one, numb-nuts) laughed at his post-Robin Hood commentary where he stated he would go “to the ends of the Earth” with his short position. But, really, all it took was someone to watch Ackman’s original thesis in December of 2012 to know that the man meant business. I watched that presentation, did hundreds of hours of my own due diligence, and never looked back on the way I’ve felt about Herbalife.
To this day, I continue to do my own due diligence on the company and am certain I can hold my own with anyone about the business model, the legalities of the company, and what makes it so damn illegal and predatory. Further, some of the smartest people I’ve ever met (like Matt Stewart, for instance) also have stuck to their convictions regarding Herbalife. As Ackman once said in an interview, since our original thesis we haven’t uncovered one fact that would change our mind as to how we feel about the company. Likewise for me. As a matter of fact, the more information that’s been uncovered, the more my convictions have strengthened. I hear this same sentiment from other shorts, most of whom agree that we feel like we’re getting closer and closer to vindication for our thesis.
As I once suggested, I believe that these few years are showing us a bona fide sea change from old money (Icahn, Soros, Stiritz) to new youthful blood (Ackman, Einhorn) running the show on Wall Street. Sorry, old heads.
I’d love to say that I agree with Mr. Ackman on everything, and I’m sure he’s just fulfilling his fiduciary to his investors, but I’m of the mindset that the timeline for FTC action is going to be a lot shorter. Further, I’m convinced that this company is going to be shut down or totally decimated within the next 6 months, and here’s my reasoning.
1. One more earnings miss will be the straw that breaks the camel’s back.
With DeSimone’s interesting accounting a hot topic of discussion in Matt Stewart’s piece “John Desimone is a Very Crafty Fellow“, the company is going to have to write down their Venezuelan exposure to the new SICAD II rate in this coming financial report. That, in addition to waning growth in North American volume points in the last earnings release, is going to put pressure on the company to deliver some kind of bullshit non-GAAP number (that doesn’t include legal fees and other items most companies count in their GAAP accounting) that the street is going to tolerate. With every quarter that passes, I guess this is going to get tougher and tougher for the company as they look for more and more ways to work the financials to their favor.
The interesting thing is that if the company doesn’t meet earnings one more time, it’s likely going to be the bottom falling out of the company – regardless of whether or not regulators act. So much of the bull thesis was backed by the fact that the company seemed like a growth machine – it simply wouldn’t stop making money hand over fist.
Should that go away, there’s no foundation for the absurd long thesis to build off of.
Should the company beef earnings and the stock fall, you know damn well the regulators are going to feel the heat to act.
2. Distributor confidence is falling
Along these same lines – if distributor confidence starts to fall off, the company could again hear the alarms coming from the inside. Here’s what I wrote in my last Seeking Alpha piece:
Which brings us to the topic of distributor confidence.
Here’s where I’d like Mr. Chapman, Mr. Hempton, and other bulls to perk up and listen.
While everyone is bickering about regulators and Mr. Ackman, does anyone else get the impression from the company’s last earnings report thatdistributor confidence may be waning?
Suppose Mr. Ackman wanted to get the eyes on his last presentation not just for regulators and for the media, but also for all of those people that are currently in Universidad del Exito in South American countries. If you were viewing Ackman’s presentation and were in the middle of a time and lifestyle sucking Club 100 endeavor, wouldn’t you then start to think twice about what it was you were partaking in? Matt Stewart points out, in a past piece, that many people from countries where Herbalife is extremely popular had tuned into this last presentation.
Mr. Ackman was right. It is an Enron style fraud when you look at how Club 100 works. I know why he was hyped up the day before – I know how he was looking at this evidence. It may not have been damning to the people like the nameless ditzy (major news organization) reporter in the room who embarrassed herself with a question during the Q&A, but to those paying extremely close attention to this scheme and how it works – that presentation was a gallon of jet fuel thrown onto an already burning fire of evidence.
If Vander Nat, who is presumably working with regulators on this (no one can get in touch with him), had any holes in his thesis to pin this company to the wall, Mr. Ackman’s last presentation just filled them like a compressed can of Herbalife “Fix-A-Flat”.
This is a confidence game. If distributor confidence begins to wane, the whole thing is going to be crumbling down from the inside out – even without the help of regulators.
3. Club 100 was the final nail
The company, bulls will tell you, likely had some leeway with the argument that there seem to be real consumers inside of these nutrition clubs. Hempton will tell you the same thing.
Well, yes, John – they’re real in the respect that they exist according to the quantum physics that govern our universe. You can reach out and touch them, they’re not figments of your friggin imagination.
But that’s where it stops. They’re not real when it comes to determining whether or not they’re actually customers, which most of them are not.
Look at this garbage – this is actually a schedule of forced consumption that one must abide by for weeks if they want to open a nutrition club:
As the world and the dolts in the media were criticizing Bill Ackman for his last presentation, I was sitting quietly at the AXA Center, eating a complimentary apple from the buffet and watching him completely unravel the most important internal foundational component to the biggest pyramid scheme in history. I also made a friend from PwC who was sitting next to me. Funny coincidence that he worked for PwC, because he was short HLF common as well and also from Canada – just like my other two buddies that are short Herbalife.
Those hosers sure are smart, eh?
When Ackman exposed Club 100 and Universidad del Exito as a fraudulent university that, as part of its curriculum, was force feeding distributors who wanted to open their own clubs by marching them around to other nutrition clubs to consumer – he officially put the nail in the coffin. Club 100 is the final nail the coffin – whether the lunk head behind me yelling his antagonistic questions and embarrassing himself during the Q&A or the reporters in attendance noticed it or not.
One person I’m sure that noticed was Mr. Vander Nat and the extremely intelligent ciritical thinkers at the FTC.
I’m convinced history will show that Mr. Ackman delivered the death blow that morning in Manhattan.
And what would a posting be without another completely disturbing Herbalife image? As first pointed out by Matt Stewart on Twitter, this is an image from a Wall Street Journal story about Ebola. This poor guy is not doing well at all. And what’s that in the background? A bottle of Formula 1 Dutch Chocolate shake! Look out Tekmira, apparently some people still think that Herbalife products can help with Ebola? Or perhaps, judging by his shirt, he could be a distributor? Where do you think anyone would get the message that someone suffering from Ebola needs Herbalife protein shake for any reason? Either way, the image is disturbing and it’s horrible to see humans in such pain. The fact that Herbalife is somehow tied to this is even more painful – but I’ll let you draw your own conclusions on what that crap is doing sitting there. (hint: this guy does not look obese).
Additionally, today, a new piece was published both on Seeking Alpha and in the Forbes questioning the decimation of the price of Herbalife’s convertible bonds. Bill Feingold at Forbes wrote:
Quoted at around 78 cents on the dollar with Herbalife stock bouncing between $49 and $50, the Herbalife convertible yields a shade above 7.25% to its 2019 maturity. In itself, this yield today suggests a fairly—not wildly–speculative credit. But the kicker is the convertibility. The bond trades at a conversion premium of only about 35%. That means that if you buy the bond today, you’re paying 35% more than if you bought the shares into which the bond can be converted. As you might imagine, the lower the premium, the more a convertible bond shares in the underlying stock’s upside. 35% is at the lower end of the range of where most new convertible bonds are priced these days, with coupons usually 2% and under. Of course, it depends on the issuer. But the point is that if sellers need to entice buyers with a big yield and a lot of option value, you have to wonder what the buyers are so afraid of.
A business associate of mine has suggested that to understand just how cheap the Herbalife bonds appear, one should look at the convertibles of Cobalt Energy, an exploration company with plenty of assets but no revenues and a major government investigation. Cobalt has an issue that matures a few months after Herbalife’s. It yields about 6% and trades at a conversion premium well above 100%. Its stock-market capitalization is in the same $5 billion neighborhood as Herbalife’s. In other words, the convertible bond market would much rather buy a revenue-free exploration firm with a Wells notice than Herbalife.
Brilliant from Feingold and a great read. The bond market thinks, in technical financial terms, Herbalife is full of shit.
Speaking of which, let me addresses Icahn’s tweet that sent Herbalife into a buying frenzy yesterday. Is this really the kind of news that this stock is going to react to? Has this become a promoted penny stock? Icahn tweets that he’s speaking to a big banker, doesn’t mention anything about Herbalife or even about public companies, and the stock runs 2%? Do people really think he’s going to engineer an LBO in the middle of an FTC investigation that is likely to decimate the company? Does anyone think Icahn would be mum on Herbalife for 4 months and then come out with that garbage as his first public statement about the company? Absurd.
Yeah right, this has “buy signal” written all over it:
What a crock. Anyway, Business Insider debunked the Tweet shortly thereafter:
Shares of Herbalife surged after a Carl Icahn Tweet dissing an “Ice Bucket Challenge” request from Jefferies’ CEO.
Some folks reflexively thought that Icahn was referring to Herbalife when he said he was working on a “BIG deal.”
Icahn’s Tweet is supposed to be a joke. It’s well known that he’s a big Jefferies client and does a lot of business with the firm.
Also, I noted on my Twitter this evening that my track record of calling Herbalife a sell, when averaged out over the course of all of my articles, has yielded more than 16% gains for those that have followed. This is from the guy telling people to short all the way up to $83, where I was constantly harassed and harangued by longs, distributors, and other such people who (in my opinion) clearly fail to see the big picture.
I’d copy/paste some of the comments I got when the stock was at $83, but I’m not prepared to rub it in that much.
As a couple of my brilliant new friends would say, “shut it down, shut it down.”
Have a great labor day weekend,
Disclosure: I’m short Herbalife. Duh.