Herbalife Ltd. (NYSE:HLF)’s share price fell sharply after a Federal Trade Commission (FTC) probe into its business practices was made public, from $65 to a recent low of $49.5, but it has partially recovered since then, pushing toward $60, as Herbalife bulls argue that there is little chance of the government actually taking action against the company. But with no new facts from the FTC investigation, arguments largely hinge on what people thought before the probe began.
Herbalife short thesis based on business model, not products
As a recent example, Herbalife Ltd. (NYSE:HLF) bull John LaRosa recently wrote an article on Seeking Alpha that “the chances of the government shutting down Herbalife are zero,” arguing that the company’s products are safe, that there are other multi-level marketing companies in business that no one seems interested in shutting down, and that shutting Herbalife would be bad PR while unemployment is still high.
“I believe Mr. LaRosa has completely missed the point of the FTC investigation, and the results of the FTC action will likely prove that in the coming year,” wrote Seeking Alpha contributor Quoth the Raven in response.
While LaRosa goes to great lengths to argue that Herbalife Ltd. (NYSE:HLF) products are safe, the short position isn’t really actually concerned with the products themselves. People like Pershing Square’s Bill Ackman argue that the product is just meant to hide an illegal business model (and if there was any evidence that they were dangerous, no doubt he would have presented it by now). In theory the FTC isn’t supposed to be concerned with public relations, but it’s also true that there is a lot of pressure coming at it from both directions as vested interests lobby aggressively.
Dueling articles show both sides digging in
“Granted, the earnings are paltry, both on a part-time and full-time basis, with the exception of a lucky few that got in on the company in the beginning,” writes LaRosa, getting to the crux of the disagreement.
To critics, that sounds a lot like a pyramid scheme. They argue that the only way to be successful in Herbalife Ltd. (NYSE:HLF) is through recruitment, not through sales, and that this constitutes a pyramid scheme. Defenders mostly recognize that the rate of failure is high, but say that this is normal for any small business venture and that profits come from high sales, either from the distributor or from downlines.
Neither side has any more information than they did when the stock fell last month, but the price is rising again as bulls dig in.