Herbalife Ltd/ (NYSE:HLF) short case from Quoth the Raven @QTRResearch
- Quoth the Raven Research continues to believe Herbalife is a strong sell with downside of more than 46.3% before the end of 2017 and further downside in following quarters
- The potential impact of a coming nation-wide documentary has been significantly underestimated and may cause an unprecedented public relations nightmare for the company that it may permanently have trouble recovering from
- For comparison, Blackfish, a similar style of critical documentary, drove SeaWorld’s stock price down 60% leading up to its release. A critical nationwide 60 Minutes expose on Lumber Liquidators helped drive its stock price down more than 80% in the months following the report
- Carl Icahn has a history of selling his stake in companies into buybacks.
- In 2016 he sold $500m in shares into Nuance’s buyback. In 2012, he sold $1.17 billion in stock back to Motorola Solutions. I believe Mr. Icahn may consider exiting his Herbalife position before the documentary’s March 17, 2017 release or before the FTC’s sanctions on Herbalife’s business model take effect in May 2017
- The company’s largest growth market, China, appears to be stalling and a newly disclosed SEC Foreign Corrupt Practices Act investigation and a new joint venture with a China-based company raises questions about whether the company is still on solid footing in its largest market
- I believe the company’s true fundamentals continue to deteriorate much more than the company’s Non-GAAP numbers and accompanying constructed narrative lead on
- I believe the only publicized sell side analyst for the company (who is also an Herbalife distributor) continues to lead shareholders to the slaughter with an absurd $90 price target
I am short Herbalife through owning put options.
I stand to make money if the price of Herbalife stock moves lower.
I am not a stockbroker or financial adviser. I hold no licenses and am not registered with FINRA or any other financial body. I am a casual investor making casual observations for the purpose of discussion and open communication and analysis of companies and stocks. Often, I am wrong. I have been wrong in the past and will be wrong in the future.
Again, all articles are my opinion only and are not suggestions to buy or sell any equity, bond, option or other financial instrument. QTR may have long or short positions in any tickers mentioned at any time and reserves the right to open, close, or modify positions at all time without notice. My conclusions are the result of my personal due diligence and have been wrong in the past. Alright, now you kids go have fun out there.
When I asked [outgoing Herbalife CEO Michael] Johnson how he felt about all the people who had lost money trying to get rich through Herbalife, he hesitated. “I’m sorry that it happened,” he said. “I’m sorry people lost money at a racetrack and at the lottery. Today’s Herbalife is about hard work and energy. I can’t go and fix anything in the past. — The New Yorker, 3/5/2017
$30 Per Share and Under: To Me, It’s Only a Question of “When” and Not “If”
In what will be my only report on Herbalife issued for the rest of this year, and possibly for good, I want to give the public my firmly held belief on why the stock could easily be $30 or under by the end of 2017.
Obviously, this differs with the “analyst consensus” targeting $90 per share, but I believe my track record of accuracy and attention to detail thus far with Herbalife should cause readers to carefully examine what I am going to present in today’s article.
I believe coming effects of the Betting on Zero documentary have been vastly understated and underestimated by the market and I am in a unique position to comment on it, having been one of the few who has had a chance to view the film prior to its release. I also believe that the company’s latest financing and corresponding buyback could possibly be used to take Carl Icahn out of his position in the company. The new and growing debt burden that the company now has to deal with and service in an environment where rates are going up could wind up being devastating, as I predict the core of the business will continue to deteriorate, eventually giving way only to a balance sheet with a book value of $2.11 per share.
Also to blame for what I believe will be Herbalife’s continued deterioration this year is a reduction in growth for the company’s largest market, China. In a small informal blog post I put up a week ago, I pointed out that I thought there was something weird about the company’s new joint venture with China-based company Tasly. While I believe that the deterioration of growth and this joint venture are likely tied together one way or another, I have yet to fill in the missing link between the two. What is for certain is that, across the board, the company’s core business is deteriorating. Analyst estimates continue to come down, the company’s guidance continues to get lower, and the GAAP numbers tell a starkly different tale than the company’s “adjusted” Non-GAAP guidance. It is using these numbers that has helped me arrive at the belief that Herbalife could very easily be worth a fraction of what it is worth today in just a few short months.
We have already seen significant selling over the past few trading days, as the stock has moved from around $60, where it was after earnings, to about $53, where it trades today. I believe this to be the
Under $30 beginning of a much larger downtrend that could once and for all wrap up the Herbalife story for the most part.
Betting on Zero Could Be PR Armageddon
The first thing that needs to be addressed is what I believe to be a vast under-estimation and flippant attitude towards a coming documentary that will be available nationally, as well as on subscription services that have millions of international subscribers. Everyone knows that Betting on Zero is going to be released on March 17 of this year. What everybody doesn’t know is exactly how devastating the film could be for the company.
It has been asserted over the last few years by me that much of Herbalife’s organic internal growth comes from the confidence of its distributors and the confidence that those distributors have in their ability to earn from potential new recruits. This film will be the first effective instance of taking what is otherwise a Wall Street story and boiling it down to a gut wrenching and stomach churning experience that any average movie watcher can experience. It could wreck the confidence of millions of potential recruits, as well as potential existing distributors.
I went into the world premiere of Betting on Zero at Tribeca having seen everything that has to do with Herbalife. Because the company declined to participate in the documentary, much of the story was produced using financial news clips and publicly available documentation on the company. These interviews and details I have memorized