Herbalife Ltd. (NYSE:HLF) was said to be the subject of a Federal Trade Commission probe, according to an article in the New York Post this morning. The company has been quick to react, putting out a press release denying knowledge of any such probe, and demanding a retraction from the newspaper.
The company's share price recovered throughout the day, after opening at $31.59, its lowest level since last December. Today's trading exemplifies the anxiety surrounding the company's precarious position, and demonstrates the lack of belief in the company, even among those betting long on the stock.
Herbalife Ltd. (NYSE:HLF) has been in the headlines since Bill Ackman announced that he was shorting the company's stock last December. The hedge fund manager asserted that the company was running a pyramid scheme, and that a Federal Trade Commission probe would likely bring it to its knees. The company has already been legally labelled a pyramid scheme in Belgium.
Many investors got in on the opposite side of that trade, but few among them were willing to profess any faith in the company. Many of them agreed that the company was involved in shady business practices, but did not expect the Federal Trade Commission to come after them any time soon, or did not expect such an investigation to cut deeply into the firm's share price.
There are a number of investors going long on Herbalife Ltd. (NYSE:HLF) who don't have any faith in the company's business model, and certainly don't expect it to stand up to a FTC probe. That's bound to cause a lot of volatility in the wake of headline pressure, like that of this morning. There are several reasons that suggest Herbalife will not be the target of such a probe, or at least that there is insufficient evidence in the NY Post article.
A report from Height Analytics, authored by Jarrel Price, takes the supposition made by the NY Post, that redaction in the Freedom of Information request made by the company points to the existence of an ongoing investigation, and may simply tear it apart.
The research firm obtained Freedom Of Information documents from several other mid level marketing companies, though not for Herbalife. What they found were the same redactions and stock language in the documents from other MLMs. That means that although the FTC may be looking at Herbalife, it is not necessarily investigating it.
What is likely is that the FTC is looking at one or more Mid Level Marketing companies and is looking at several other publicly traded MLMs as a comparison. It is impossible to rule out an investigation into Herbalife from the evidence, but it is irresponsible to suggest that such a probe is the only answer, or that it is more likely than other explanations.
Herbalife was the third most complained about public Mid Level Marketing firm in 2011. Avon Products, Inc. (NYSE:AVP) and Primerica, Inc. (NYSE:PRI) were both responsible for more complaints to the FTC.
Herbalife Ltd. (NYSE:HLF) shares closed at $35.10 on Friday, but opened at $31.59 on Monday morning before market trading took its toll. The stock then fell to lows of $30.84, but eventually began to rally, as investors shook off the notion of an FTC investigation. At time of writing, Herbalife stock was trading at $34.45.