Herbalife Ltd. (HLF): Dog, or Just an Underdog?

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Herbalife Ltd. (HLF)Short-sellers and hedge funds may be shadowy, but sometimes they’re the smartest guys in the room. They’ve done their homework, and they’re willing to bet their capital against the crowd — an investing strategy that can be as lucrative as it is contrarian.

On Motley Fool CAPS, the 180,000-member-driven investor community where informed opinion is translated into stock ratings of one to five stars, we also have investors who find the chinks in a company’s armor and correctly call its fall. We call them “Underdogs” if they’ve earned 100 or more CAPS points by correctly predicting that one or more stocks would underperform the market.

Today I’m looking at nutritional supplements maker Herbalife Ltd. (NYSE:HLF) , which lost more than a third of its value after becoming the centerpiece of an argument between dueling hedge fund operators. Investors remain wary of its multi-level marketing structure, so there’s little doubt why the nutritionals seller carries the lowest one-star CAPS rating.

It’s been a bit of a wild ride, so if there are any who’ve scored big by correctly predicting which stocks will fail, it may be worth our while to check out those they think will ultimately succeed. And CAPS All-Star Valyooo is one who’s earned the underdog moniker and recently predicted that Herbalife Ltd. (NYSE:HLF) would rout the shorts.

Herbalife snapshot

Market Cap $4.3 billion
Revenues (TTM) $4.1 billion
1-Year Stock Return (35%)
Return on Investment 50.6%
Estimated 5-Year EPS Growth 14.8%
Dividend and Yield $1.20/2.9%
Recent Price $41.50
CAPS Rating (out of 5)
*

Source: FinViz.com.

Of course, not every short sale goes as planned, which makes shorting a risky proposition. Stock prices can be irrational longer than you have money to stay in the game. And you don’t want to end up with fleas by lying down with the dogs, so make sure you do your homework.

A scary opportunity
Not that there haven’t been doubts before about Herbalife Ltd. (NYSE:HLF) and its MLM business model, but when David Einhorn of Greenlight Capital appeared on the supplement maker’s conference call early last year asking some tough questions about its operations, investors immediately suspected the worst and bolted for the exits. Einhorn never did take a position in Herbalife Ltd. (NYSE:HLF) — short or long — and it seemed to be on its way to a comeback when Pershing Capital’s Bill Ackman made a very public splash of his very large short position, raising all the same fears and once again plunging the stock into chaos.

That itself turned into a bit of a melodrama when Daniel Loeb and Third Point Capital went very long on Herbalife Ltd. (NYSE:HLF), saying it was ludicrous to think the FTC would shut down the company. Then Ackman’s longtime arch-nemesis, Carl Icahn, came out and disparaged his rival’s position, with the two getting into a verbal sparring match on CNBC.

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