Saturday, January 5, 2013
Ackman's Herbalife thesis: someone from the government will help poor people and billionaire hedge fund managers...
I was just on CNBC talking about Herbalife. Nervous as they come and was propped the wrong way by the sound guy (and hence never looked at Herb Greenberg who interviewed me).
But here is the quick summary.
I agreed with Bill Ackman that Herbalife is mostly about ripping off distributors and people at the end of the chain. The product is more than twice as expensive as competitor shakes. I called Herbalife "scumbags".
But they are highly cash flow positive scumbags and they will use the cash flow to buy back shares. Over the past five years the share count has gone from 140 million to 108 million and will fall further.
They are scumbags then - but they are scumbags working for stock market investors.
That I pointed out was similar to tobacco companies. Tobacco companies kill 5 million people globally per year - 400 thousand of them in the USA. Is anyone stupid enough to think the government would close them? That has been a bad short thesis for decades!
Bill Ackman is shorting a profitable company - and his argument is that they run an illegal pyramid scheme. By implication his argument that the government is going to somehow close them down.
That is a really truly awful short thesis - the short thesis that Government is going to come and help poor people and a billionaire hedge fund manager! Normally neither group is high on the agenda!
I said that I had reported many frauds to the SEC. Sometimes the SEC acted. Mostly it did not. When it acted it was often after the stock had gone to zero.
If my thesis was the government was going to help me then I got it wrong!
Bill Ackman has that one wrong!
I did not state other important parts of the argument.
(a). Being wrong on crowded shorts is very dangerous indeed. Herbalife is a crowded short - the short is however mostly one person - Bill Ackman - who has a massive position.
(b). The nutrition clubs have some merit. I once shared house with a lesbian Avon lady. She sold a couple of hundred thousand dollars worth of make-up a year. Her shtick was simple. She visited women stuck in outer-suburbia - the land of the 3 hours of daily commute. Their husbands were away from them for 11 hours a day and they were very stuck. She would play with them - putting makeup on them like 14 year old girls put makeup on each other. She would tell them they were beautiful and be supportive. This was multi-level marketing as decentralized support mechanism and it worked.
The nutrition clubs are like that. Fat men turn up and share a shake with other fat men and support each other to lose weight. It is sort of a Hispanic obese person's version of alcoholics anonymous. Mostly Hispanic anyway - as it started in the Hispanic community. Guys turn up and they say something like "My name is Jose and I am fat". It works.
The Manhattan version of support for weight loss is a highly priced gymnasium with a personal trainer to push you to remove the pounds. But it is blindingly arrogant to believe that that is the only valid sort of support group for weight loss.
I also did not say what I think Herbalife's strategy should be. They are going to offer a defence. I think it should be bland - simply a statement of profits and maybe the merit of the system.
Anything to allow Herbalife to buy back more stock. Herbalife has a lot of capacity to buy back stock as it is very cash flow positive. The more stock they buy back the better for remaining shareholders.
I might wind up a remaining shareholder. So I hope they buy a huge quantity of stock back - and the easiest way to do that is to do that when the stock is cheap - that is right now.
As per usual on this blog I could be wrong. The government might just decide to help a billionaire hedge fund manager out and save Bill Ackman from his oversized position.
That however is something I am willing to bet against.
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