Herblife Ltd. (NYSE:HLF) is in the midst of a substantial rebound, as the aggressive short set against the company by Bill Ackman appears to falter. The rebound in the firm’s stocks has been sustained throughout the latter half of this week.


It all changed on Christmas day for the firm. Between Ackman’s presentation on the short on December 20 and market close on Christmas Eve, the firm’s shares lost more than 30% of their value. Since the market reopened on December 26 to current prices, the firm’s stock price has risen by more than 15%. Herbalife Ltd. stock now stands at just over $30, over 30% below its price one month ago.

The rebound in the firm’s price will, could cause those who followed Pershing Square Capital into the short to question the future of the trade. Bill Ackman set a price target of $0 on Herbalife Ltd. (NYSE:HLF) saying that because it was  pyramid scheme, that was all it was really worth.

So what is the real reason behind the Herbalife “Christmas Miracle”? There are several possible explanations. The first speculative explanation, and most reassuring to those shorting the company, is that Hebalife Ltd. (NYSE:HLF) stock is suffering from  “short squeeze.”

During a short squeeze, a  stock’s price begins to rise as more and more of the investors shorting the company seek to purchase shares in order to exit their short positions. The increase in demand causes the price to rise and more investors holding shorts wish to buy stock. The vicious circle can result in quite a substantial rise in stock price over a short period of time.

The characteristic of a short squeeze, that makes it more reassuring to those holding shorts, is the fact that it is more of a market aberration and has little to do with the real value of stock. Given time, the process will more than likely peter out, leaving the short sellers with the fortitude and confidence to hold on in position and pick up on the expected fall in the price of the stock.

Unfortunately for Bill Ackman, and Pershing Square, if the process continues beyond New Years Day, and Ackman does not alter his position, it will make the firm’s 2012 performance figures look terrible, though, if the firm does fall, it will deliver a boon in 2013.

There are other explanations for the quick rise in Herblife Ltd. (NYSE:HLF) stock. The firm might indeed, as some investors pointed out, have fallen too far too fast. That dynamic, if picked up upon by a multitude of investors, could feed into a short squeeze situation.

Competing explanations point to the relative strength of Herbalife Ltd, (NYSE:HLF). and argue that the company is unlikely to fall to a short attack like this because, it is simply too profitable. Herbalife is the talk of the town right now, but any investor with even slight risk aversion and no depth of understanding in the math will stay away.

However this trade shakes out, it will be the defining moment of Ackman’s 2012, and Herbalife’s. The firm has lost 40% of its share value this year, and just 14% of that came before Ackman’s attack. The company’s shareholders and board are reeling, but clearly not about to give up.