Whitney Tilson Discusses Short HLF And EXAS Positions

Whitney Tilson Discusses Short HLF And EXAS Positions
Whitney Tilson

The following is from an email from Whitney Tilson. He discusses his long Tetragon Financial Group Limited (AMS:TFG) position as we first reported, updates his Berkshire Hathaway analysis, discusses his Herbalife short, and his new short in EXAS, as we first reported – see the excerpts from his email below.


Whitney Tilson updates his presentation on Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) and announces his long position in Tetragon Financial Group Limited (AMS:TFG).

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Whitney Tilson updates Berkshire presentation; Long on Tetragon

I’ve updated my Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) presentation, which is always posted at: www.tilsonfunds.com/BRK.pdf, and now peg intrinsic value at ~239,000.

In the latest issue of Value Investor Insight (to which you can subscribe at: www.valueinvestorinsight.com), I wrote a two-page article on my newest long position, Tetragon Financial Group Limited (AMS:TFG). (attached).

At the Value Investing Congress earlier this week, I gave a presentation entitled Lessons From a Dozen Years of Short Selling and then updated my analysis of two very successful (but still attractive) short positions, K12 and Lumber Liquidators, and presented one of my current favorite shorts, EXACT Sciences Corporation (NASDAQ:EXAS). I’ll send it around in a few days (we give the people who attend a few days of exclusivity).

Whitney Tilson: Research on Herbalife’s nutrition club

Speaking of my favorite shorts, Christine Richard published an article in Seeking Alpha on Tuesday about her research into Herbalife Ltd. (NYSE:HLF)’s Nutrition Clubs. It’s a heck of a good story and shows clearly the “fiendishly clever” things HLF is doing:

The Club 100 system is fiendishly clever. It ensnares countless people all over the world in Herbalife’s web, drains them of their time and money and, best of all (from Herbalife Ltd. (NYSE:HLF)’s point of view), results in a great deal of consumption of Herbalife’s products, which makes it much harder for regulators to detect and shut down this sophisticated pyramid scheme. Finally, it is clear why we don’t see very much Herbalife product stacked in garages or dumped on eBay, and why so little is returned to the company. Most of the product is indeed consumed, but not, as Herbalife would have you believe, by real customers but rather by those pursuing quotas established by the company’s top distributors for people they deceive into pursuing a false promise of the American Dream.

Shut out by language and cultural barriers, by suspicion that we were compliance officers or immigration officials posing as Wall Street researchers, and, most importantly, by a system that created its own illusion, it would be three years before I understood it. Now, thinking back on that morning in Queens, I understand why the men crowded into that second-story Nutrition Club in Queens appeared to be such unconvincing customers – it’s because they weren’t real customers. Instead, they were spending money they couldn’t spare to drink a shake they probably didn’t like to lose fat they didn’t have in order to pursue (or help a friend or family member pursue) a “certification” for a “business opportunity” that doesn’t exist for the overwhelming majority of people. They weren’t customers in any traditional sense of the word; rather, they were paying the price of admission to a fraudulently promoted business, one shake at a time.

Herbalife’s generous return policies do not make it a pyramid scheme

More on Herbalife Ltd. (NYSE:HLF): an interesting post on the FT blog by Scott Johnson, who runs the blog Stop the Amway Tool Scam (http://stoptheamwaytoolscam.wordpress.com), responding to an article by Dan McCrum (http://ftalphaville.ft.com/2014/08/06/1918962/herbalife-and-some-big-numbers). In it, he addresses the point made by HLF bulls that the company’s generous return policies mean it can’t be a pyramid:

Dan, another useful piece of information to have is this: How is the business is presented to prospects? If it is presented like Amway, which I strongly suspect it is, based on the mountains of evidence Ackman has provided that shows HLF to be an Amway clone in virtually every aspect, the opportunity to make money is what is emphasized, not the products. In this case, it is doubtful most people sign up to use the overpriced powdered shakes.

It is much more likely people signed up with the intention to be distributors, then chickened out or got rejected by one person, and decided to literally eat (or in this case, drink) the inventory. This happens in Amway all the time, probably well over half the distributors fall into this category. Who would want to admit they are a coward? It is much easier to claim you just bought the shakes because you wanted to buy overpriced shakes.

Or perhaps they tried hard and failed to sponsor anyone, or sponsored a couple who quit right away (see above) and also decided to eat/drink the inventory. Many of them tried to succeed for over a year, as the upline encourages people to do, and the one year product return limit expires. Also, who would want to admit they are a failure? Again, it is much easier to claim you just bought the shakes because you wanted to buy overpriced shakes.

People are also naturally lazy, particularly group 1, above. Therefore, they don’t want to go to the trouble of finding out where to send the shakes, get a box big enough, determine how not to pay for shipping, place the items and packing material inside, take the box to the Post Office, wait in line, and ship it. It’s much easier to eat/drink the products, give them to a charity, family, friends, or just let them rot on the shelf until the next time they clean out the closets.

As a former, 16 year Amway “veteran,” having conducted extensive research since 2005, and an astute observer of the way people think and act, I know what I’m talking about. I simply don’t buy Hempton’s story, it is far too simplistic of a reason for Ackman not to have considered or discovered by now. It is implausible to think Ackman would spend $50 million and not already come across this possibility.

See Whitney Tilson’s presentation on Berktshire Hathaway in PDF format here and presentation on Tetragon in PDF format here.

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