Carl Icahn Sees More Upside for Herbalife Stock
Some had given up Herbalife Ltd. (NYSE:HLF) for dead not long ago, including noted billionaire Bill Ackman, who has notably shorted Herbalife stock, betting almost $1.0 billion against it. Yet other hedge fund managers, like Carl Icahn, are increasing their stakes in a truly bullish display.
Which of the two millionaire activist investors should you trust? Bill Ackman’s Pershing Square Capital Management firm took a big hit recently thanks to Valeant Pharmaceuticals Intl Inc (NYSE:VRX), which has been fighting a war of poisonous words against Ackman over the Herbalife stock file. Ackman has even suggested, perhaps trying to persuade more investors to sell HLF stock, that Carl Icahn was himself shedding some of his Herbalife positions.
Indeed, on August 26, Icahn seemed rather pleased with himself as he announced that he has increased his HLF stock holdings. Herbalife, which makes dietary supplements and slimming products, has been the focus of a highly publicized battle for several years. Icahn said he bought 2.3 million shares, adding that he remains bullish on Herbalife because it has a valid business model that creates a lot of jobs. (Source: “Icahn buys 2.3 million more Herbalife shares; slams Ackman’s ‘obsessive’ remarks,” CNBC, August 26, 2016.)
The U.S. Securities and Exchange Commission (SEC) confirmed that Icahn does in fact control a 20.78% stake in HLF stock, rather than the 18.32% stake indicated in a previous audit in mid-July. So Ackman achieved the opposite effect he intended; Herbalife shares took off, moving from $57.00 to $63.00. But did Icahn buy more HLF stock just to spite Ackman in what seems to be a rather personal feud? (Source: Ibid.)
The Bullish Case for Herbalife Stock
Does Herbalife have a compelling bullish argument to persuade even average people like you and me to see a bullish hue? HLF stock did drop 2.31% in the session following Bill Ackman’s assertions about Icahn’s alleged bearish intentions. Under that logic, it would be reasonable to expect Ackman to buy more shares to boost the share price. But there might, in fact, be more substance to this seemingly petty dispute.
Herbalife, founded in 1980, sells its meal replacement and energy bars in over 80 countries. The company adopts a sometimes-controversial sales practice involving a network of distributors who essentially take care of the sales at home.
But Ackman doesn’t see it through such rosy lenses. He has long accused Herbalife of running a “pyramid scheme,” making money not by selling its products to individuals, but by recruiting new resellers who, he suggests, are continually forced to buy these products. Icahn has defended the company.
And here’s the most important part to remember if you’re planning to get into some HKLF stock today: after an investigation, the Federal Trade Commission (FTC) had finally ruled that Herbalife does not run a fraudulent operation. That having been established—and Ackman’s short position being based on the suspicion of fraud—unless some huge new evidence appears (a highly unlikely scenario), the legality of Herbalife’s operation will tend to drive the stock higher rather than lower.
It’s true that Herbalife did not come out squeaky clean. The authorities have recommended changes to the company’s business model, which will have to differentiate more clearly between its customers and sellers. However, as Herbalife complies with the demanded changes—and it has no choice in the matter—it also eliminates any further or lingering suspicion of wrongdoing which might pop up to hurt HLF shareholders.
As the ultimate sign that Icahn has won game, set, and match, he has discussed the possible sale of a Herbalife stake to a group of investors, which includes activist William Ackman, his eternal rival. Jefferies Group wants buyers for an 18% stake, valued at nearly $1.0 billion. Icahn is the largest Herbalife individual investor. (Source: “Carl Icahn Mulled Selling Herbalife Stake to Group That Included Bill Ackman,” The Wall Street Journal, August 26, 2016.)
The Bottom Line on Herbalife Stock
Herbalife enjoys strong political support from both sides of Congress. Republican Presidential candidate and real estate billionaire Donald Trump has not hidden his links to Herbalife, and neither has Democratic candidate Hillary Clinton, nor former Secretary of State Madeleine Albright, who advises Herbalife. (Source: “Herbalife’s Endgame,” Slate, May 9, 2016.)
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