Herbalife Ltd. (NYSE:HLF) is one of the most talked about stocks at the moment, but for all of the wrong reasons. Bill Ackman is on a Herbalife killing spree. Whitney Tilson said the analysis Ackman did on the company was the best he’d ever seen. And the firm’s stock has fallen by almost 40% in the last month.
One of the most dangerous atmospheres, in economic terms, is when you look around and everybody is agreeing with you. There appears to be very little dissent regarding Ackman’s opinion on Herbalife Ltd. (NYSE:HLF) (FRA:HOO), and he’s set a price target of $0 on the company. In an atmosphere like this, with such an extreme outcome as the only prediction, it is important to find the opposing thesis.
On searching, there are in fact several investors who think that a massive short on Herbalife Ltd. (NYSE:HLF) (FRA:HOO) is a really bad idea. Most of the analysts opposing Ackman agree almost completely with his thesis, they just don’t think it will turn out as clean as he hopes it will.
The Bronte Capital Blog, found here, suggests that Herbalife Ltd. (NYSE:HLF) will be Ackman’s Stalingrad. The eventual victor, according to Bronte, will be so bloodied as to make the victory almost meaningless. Bronte estimates that Ackman is shorting Herbalife by more than one billion dollars.
The antagonistic thesis offered by Bronte is this, Herbalife Ltd. (NYSE:HLF) is too powerful and profitable to collapse under the weight of Ackman’s current media barrage, the easiest way to recover is to buy back stock, and they now have an incentive to return their profits to shareholders.
The repurchase of stock by the company will buoy the price, and the return of the company’s profits to shareholders will increase the gains made form a long bet on the firm. The thesis is oddly seductive, it does, however, rely on betting against Bill Ackman, something only the very brave will try.
There is certainly precedence for this occurrence. Back in May, when David Einhorn questioned Herbalife Ltd. (NYSE:HLF), the company bought back stock and relieved the pressure weighing on them. Herbalife knows how to survive, and that is all it must do to escape the current bad patch.
The second most popular thesis, and one different from that espoused by Bronte, is that Ackman is correct, but the fall in price has happened much too quickly. Herbalife Ltd. (NYSE:HLF) is likely to bounce back. Bret Jensen, former strategist at Simplified Investment Management, is a proponent of this argument.
Kerrisdale Capital is another proponent of going long on Herbalife. That company believes however, like Bronte, that the firm is simply too solid and strong to fall under Bill Ackman’s attack. The firm tweeted about their position yesterday.
So should I bet long on Herbalife Ltd. (NYSE:HLF)? Is there enough evidence to support the thesis that Ackman can’t win? Almost certainly not. Unlike Ackman, who released his entire analysis of the company, nobody who wants to bet long on Herbalife has released their mathematics.
All we have for the bet on Herbalife is a single well thought out thesis. There is no telling which way this will turn out.