How not to apply for a job - L'Oreal edition

I accepted an invite on LinkedIn from a finance student at an Australian University.

Nothing unusual about that.

Said finance student then decided to pitch me a short idea in this case in the hope of getting an internship.

Again nothing unusual. Indeed this is how about a third of our employees joined us.

Just that this one was funny. So here goes.

Finance Student (FS): John, you gotta give me an interview. I have the short to end all shorts!

Me - John Hempton (JH): lets chat, though there are plenty at the moment

FS: Okay great John. The ticker is EPA:OR - L’Oreal. Truly a terrible company.

JH: ha ha. What makes you think that?

FS: John, are you pulling my leg? Surely it is obvious. If you are being serious I can explain.

JH: Please do. What phone number?

JH (later): I am expecting to call you. What number?

FS: John, I only have one shot at this so please give me some time to put my thoughts/thesis together. I will be in touch early next week if that’s okay?

JH: Okay. But I genuinely suspect that you are mad.

The big area of disappointment at L'Oréal is the hair dye business over the past fifteen years.

So I guess explaining what the business is and how it went wrong is a key.

FS: I think after you hear my explanation you will truly realise what a disaster of a company this is. Perhaps even elements of fraud going on.

JH: I am intrigued.

But the hurdle here is high. Company has generated 2-3 billion of free cash per year for a very long time. The business smells very profitable.

You are betting against female vanity - and that is not normally a good bet.

FS: John, sorry, I’m pitching this idea to Jim Chanos from Kynikos in the coming days, are you familiar with him and his fund? Unfortunately this means I won’t have time to pitch it to you, but let’s circle back if he doesn’t go for it.

JH: I know Jim well, but I am deeply skeptical. I am almost certain you are wrong.

Give me 15 minutes as a pitch if you want. If you can get past that it will help with Jim.

If you can convince me I will be deeply surprised

FS: Look, John. Let me have a chat to Jim about this first. I don’t want you front running him and soaking up all the alpha in the trade. If he gives it the green light, I will speak with you first. The last thing yourself, Jim and I would want is a ‘Herbalife-eque’ activist campaign happening on any of either 3 of us hold as result of bad-blood.

Will be in touch.

One thing I must say though, John - I have had MANY girlfriends, all of whom use hair products. I am also a European native, so I am afraid I am beginning with a head start on this one.

JH: I am European and I have had girlfriends might be the height of arrogance...

FS: John, I understand you may be upset... but that doesn’t mean I am wrong

JH: No. But you have already proved that you know nothing about the business. By suggesting that your girlfriend is the target market for hair dye.

That is unlikely to be true unless your girlfriend is 45+.

Genuinely you come across as pig ignorant.

FS: You must know there is a certain something I relish in a 40+ year old Italian woman. They are like nothing else, John 👌

May I ask, do you think L’Oréal is at fair value, under valued or (dare I say it) under valued?

JH: It is not cheap.

But 6x sales is the new normal

Nothing here is cheap.

L'Oreal is 6.8x revenue

Biggest competitor Estee Lauder is 7.4x revenues

Key suppliers

Givaudan - 6.7x revenue

Croda - 7.9x revenue

But telling us that these companies are pricey is not worthy of analysis.

Whatever, see if you can answer the big question - which is why hair dye  has  been problematic for 15 years?

It goes on. Dear graduate students - this is not how to apply for a job. But it is quite amusing...

JH

Open letter to Institutional Investor Magazine

Last night Australian time Institutional Investor published a piece on Bronte Capital's position in Herbalife.

To quote the opening sentence:

Australian hedge fund manager John Hempton, the co-founder of Bronte Capital, has turned out to be a true believer in Herbalife, the controversial multilevel marketing company that has been under investigation by one federal agency or another for several years. Over the past year, Hempton doubled down on Herbalife...

I observed on twitter that contrary to standard journalism ethics the author (Michelle Celarier) did not seek our comment before publishing.

She told me to check my email. So I did. Ms Celarier did in fact send something.

Here it is:

Michelle Celarier
01:15 (12 hours ago)

Hi John 

I am writing a news story for Institutional Investor about your investment in Herbalife, as you disclosed updated filings for the quarter.   

I note that you've been adding to your position over the past year, according to the SEC. 

I also quote from your recent letter about Herbalife-- and note your performance this calendar year. 

Just wanted to let you know about this. I'm on deadline, so if you have further comment please respond asap. 

Thank you 

Michelle

Michelle Celarier
michellecelarier.com
917 971 0279
m.celarier@gmail.com 

Follow me on twitter @mcelarier

You will notice that this came at 1.15AM Australian time. It came when I was (and could reasonably be expected to be asleep). The story was published before I woke up at approximately 6AM.

This is a clear breach of journalist ethics. But it is also sloppy and demonstrates what happens when you do not check your facts.

There are two reasons our Herbalife position has increased.

a). Our fund was closed and it re-opened. We got considerable flows. We adjusted the Herbalife position to match the flows.

b). We sold a large position in the 50s (when Bill Ackman covered) and we repurchased it (and then some) at lower prices.

The second one is instructive. If you sell a $1000 worth of Herbalife stock at $53 and buy it back at $27 you will wind up with more Herbalife stock. (This trade matches some of what actually happened in our book.)

For these reasons our Herbalife stock position (measured in number of shares) has increased considerably.

But the position measured in the percentage of the fund at cost has actually shrunk. We did not "double-down" as the article suggests - we actually took some off the table.

The article is false and should be withdrawn.

The statement that we doubled-down is contrary to both our risk management policy and what actually happened.

That said: for the record we still think the stock is a good value at this price. We have a full-sized position now (or we would buy more). But that is not a newsworthy story. The only story Michelle Celarier has is that a fund manager is bullish about a stock they own.





John Hempton

A quick comment on the Herbalife results

Herbalife reported after market.

There was a lot of noise. Margins in various markets fell. There is the usual Herbalife currency noise. 

But lets cut through all of that.

I don't particularly care in this case whether you believe that Herbalife is a scheme that rips people off on their sales or whether you believe (as I do) that Herbalife is a network whereby weight loss products are sold via community support.

At the end of the day profits will eventually follow the volumes of product they sell.

If they are crooked profits will follow volumes.

If Herbalife is (as I argue) a true social support network profits will still eventually follow volumes.

Herbalife has for as long as I know used a consistent measure of volume - the volume point. This is not an arbitrary measure of volume. It is the mechanism by which distributors are paid and which real cash moves. 

With a single exception this quarter and only in a trial way in Brazil and Mexico a volume point has an unchanged meaning for the last decade.  For example a small tin of Formula 1, their main product and the largest selling diet shake in the world, is 23.95 volume points. It has been 23.95 volume points unchanged for decades.

The price of the product changes, but the number of volume points does not change. Changes in volume points are real changes. When volume points fell as the company implemented the changes demanded by the Federal Trade Commission those were real falls in volume.

And when volumes rose this quarter they were also real changes in volume. If they increase price revenue will grow even faster. 

Here is the volume points by sector this quarter versus the previous corresponding quarter.

	Three Months Ended												Six Months Ended
		June 30, 2018				June 30, 2017				% Change				June 30, 2018				June 30, 2017				% Change
		(Volume Points in millions)
North America			336.4				284.1				18.4	%			639.6				586.7				9.0	%
Mexico(1)			237.1				228.9				3.6	%			458.9				454.4				1.0	%
South & Central America(2)			136.3				137.5				(0.9	)%			284.8				290.7				(2.0	)%
EMEA			319.5				283.6				12.7	%			614.2				557.8				10.1	%
Asia Pacific			302.8				275.9				9.7	%			589.4				536.7				9.8	%
China			196.1				153.9				27.4	%			337.2				335.9				0.4	%
Worldwide(3)			1,528.2				1,363.9				12.0	%			2,924.1				2,762.2				5.9	%

You see the highlighted things right. Volume points rose 12.7 percent this month in Europe, Middle East and Africa, 18.4 percent in North America and 27.4 percent in China.

This is an acceleration in growth. 

Now there are a couple of anomalies here. Firstly the United States (by far the bulk of the the North America segment) is lapping the particularly bad quarter when the company implemented the reforms the Federal Trade Commission demanded. China is lapping a strange quarter. Herbalife raised prices in March 2017 and volume points were particularly high in the first quarter of 2017 and low in the second quarter as customers bought purchases forward to beat the price rise.

But even without these anomalies Herbalife volume growth accelerated. A lot.

Now I say this because even if you believe Bill Ackman's thesis it is not a good stock to be short. Earnings growth is coming. And regulatory problems have passed.

--

But for a true Herbalife bull these results are even sweeter. 

Herbalife was made to change its operating rules in North America by the Federal Trade Commission. These rule changes ensure that Herbalife distributors can identify ultimate and real consumers for their product. Mostly the product is UPS direct from Herbalife to the identified ultimate distributor. Alternatively you go into a club and your name is taken. 

If the Bill Ackman case were correct (even in any substantial part) this would mean that Herbalife sales would collapse because Mr Ackman argued there were no ultimate customers and inability to identify them would make sales go away.

There was comment after comment from short-sellers arguing this and noting this quarter was going to be even harder as certain changes had to be fully implemented this quarter.

18.4 percent growth and record volumes in North America confirm what I knew - the vast bulk of Herbalife's sales are legitimate sales of diet products sold with community support networks to help people stick to their diet.

Herbalife remains an ethical company selling a product for which there is a real need.

And now it is a growth stock to boot - with very high incremental returns and a PE way below the market average.

All aboard. 




John

PS. My long post - the detailed background to the Herbalife story - is standing the test of time.

Nasdaq and the New York Stock Exchange (and possibly Herbalife) team up to help organised crime

Charlie Gasparino suggested in a tweet and a story that Herbalife, the Nasdaq and the New York Stock Exchange have teamed up to produce an anti-short-seller Bill. The Bill forces disclosure standards on short sellers.

I have no conclusive evidence either way as to whether Herbalife is involved behind the scenes or not. However the Bill is real and Charlie is usually a fairly thorough reporter and I have no reason to disbelieve him. And Herbalife has not denied the story.

The Bill is a threat to my physical safety. 

I want to assure readers that I am not exaggerating in the slightest. 

Bronte has a business model on the short side of maintaining a large database of people we regard as crooked and finding stocks associated with them and shorting those stocks. Often we do not know the full extent of the crook's business - we are just running on pattern recognition.

One such stock was China Agritech. We were short it originally because there was a minor crook associated with it. We worked out plenty including some ridiculous disclosures such as "proprietary nano-honeycomb embedding and microelement deep complexing technologies" in their organic fertiliser. Shorting a company associated with low-level scammers that literally claims to sell high-tech shit is just my style. 

Unbeknownst to me at the time however the Chief Financial Officer of China Agritech - Mr Yau Sing (Gareth) Tang- had a history. Mr Tang and Mr Jimmy Hueng were the directors of a Hong Kong Company called Win's Prosperity Group which collapsed. The story is told by Professor T. Wing Lo in the British Journal of Criminology. The direct quote (about a Hong Kong stock scam) is:

This case began with the renaming of a listed construction company, OLS Group, as China Prosperity Holdings (CPH) on 29 April 1999. Coincidentally, both the Chinese and English words for ‘Prosperity’ were the same as in Jimmy’s company, Win’s Prosperity Group. Jimmy Heung and a Mr Tang were the only directors of Win’s Prosperity Group. Tang was also the Executive Director of CPH, but Jimmy, as a triad figure, is not allowed to hold directorship of any listed company.

Jimmy Heung - now deceased but then Gareth Tang's regular business partner - was easy to find. His father was the founder of the Sun Yee On Triad. It was widely reported he was the Triad boss at the time China Agritech was fleecing American shareholders.

Anyway I publicly ridiculed China Agritech on this blog. Obviously I did not know of Triad involvement when I did this as I am not stupid or reckless. But not knowing Triads are involved does not obviate their involvement.

I stopped talking about China Agritech when I received threats of violence by phone from China from people who made very clear that the threats were credible. I reported these threats at the time to the Federal and local police which made it apparent to me that the Australian system wasn't well equipped to handle cross-border threats from China.

And more importantly I vowed to become far more restrictive about what I would say about short positions and what I would disclose about short positions in the future. 

Whatever - China Agritech was listed on the NASDAQ. It wasn't a small pink-sheet company and it had institutional shareholders. 

China Agritech is dead and buried now - and so is the Triad figure who was responsible for this fraud - so I feel safe enough talking now. I do not feel safe talking about this stuff generally. Indeed I would never willingly disclose such a short. Unless forced to by this Bill.

What this Bill will do is allow Triads and other organised crime gangs to list stocks on American stock exchanges and not worry about market participants anonymously exposing the natures of their crimes. The short-sellers will have to disclose themselves, not only to the SEC, but also to the those that will do them harm.

I say - without fear of exaggeration - that this is the Organised Crime Stock Fraud Protection Bill.

I can understand why crooked companies might support this Bill. And it gives me pause that Charlie reports a company that I own supports this Bill. But I have no understanding (other than a cynical grab for listing fees) as to why the NYSE and NASDAQ are happy for Sun Yee On Triad companies to list on their exchanges and why they support a Bill to protect them.

--------------

Why should shareholders have to disclose positions anyway?

Running a funds management company you only really have one output. Positions in stock market. That is your intellectual property. 

There is no other business I know where the business is forced to disclose the entirety of their intellectual property.

That said - I can think of a decent reason to force disclosure of long positions. If I own a share I own a vote. If you own a share you also own a vote. If own 30 percent of a company in most cases I can effectively control it. My votes impinge on the power of your votes. 

Because my ownership of shares can change the value of your ownership of shares most countries force disclosure when ownership stakes become large enough to matter (typically, but arbitrarily at five percent). This seems a reasonable compromise between keeping the buyer's intellectual property private and allowing the rights/control issues around a company to be visible to market participants.

However when I short a share I have no rights whatsoever - just an obligation to buy back the stock sometime. My short position doesn't impinge on your long position except in as much as there are deferred buyers in the stock. The above argument for forcing disclosure simply does not apply.

Indeed other than symmetry for symmetry's sake I can't think of a single argument for forcing short disclosure and I can think of strong arguments opposing it.

I would like the NYSE and the NASDAQ to lay out a cogent argument (other than mere symmetry) why disclosure should be forced and why this does not protect organised crime.

If Herbalife is truly behind this Bill (as Charlie Gasparino reports) then I would also like an explanation of why they support the Bill.




John Hempton

Post script: Charlie Gasparino has since contacted me and assures me that Herbalife has confirmed the story.