Hedge Funds and Herbalife

Hedge funds and Herbalife Who wants to be a Millionaire

hedge fund-herbalifeHedge fund manager Bill Ackman appropriated the title of the game show for a presentation labeling multilevel marketing firm Herbalife Ltd HLF +0.84% a “pyramid scheme,” a charge the company disputes vigorously. Rather than joining him in selling shares of the stock short, though, fellow activist investors Dan Loeb and Carl Icahn seemingly drew inspiration from another classic: “The Price is Right.”

The fight involving Herbalife’s stock is a stalemate for now, but Monday’s first-quarter earnings could tip the scales toward those who see it as an investment opportunity. Earnings are seen at $1.06 a share versus 88 cents a year earlier, according to FactSet.

In fact, since hedge-fund manager David Einhorn sent the stock reeling a year ago with skeptical questions on an Herbalife analyst call, expectations for 2013 have risen steadily. The stock’s prospective price-to-earnings ratio was nearly 19 times then and is just 7.8 times today.

Bill  Ackman may be both right and wrong. If Herbalife really relies less on bona fide sales than on recruitment of new, low-level distributors who often get stuck with unsold inventory, it technically may meet the Federal Trade Commission’s criteria for a pyramid scheme. But Herbalife has been in business since 1980 and there is no immediate reason to believe it will face a crackdown after all these years.

For its part, the company says 71% of distributors don’t oversee others, and largely consume its nutritional products themselves. Some multilevel-marketing observers disagree, saying most naively view it as a business proposition and that 99% will make no net gain.

Even if such critics are right, Mr. Ackman may lose money absent regulatory action. Mr. Loeb took that gamble because he spotted good value. He said a stock buyback and modest rise in Herbalife’s P/E ratio to between 10 and 12 would lift its stock to $55 to $68—well above today’s price of around $38.

Hedge fund manager Bill Ackman says he has never been more confident in an investment thesis and has put around a billion dollars of his fund’s money where his mouth is. In light of that, investors eying a bargain have to play a dangerous but potentially rewarding game: “Are You Smarter than a Hedge Fund Manager?”

Read More: WSJ

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