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Herbalife Ltd. (HLF) Is a Risky Investment

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Not many companies have been surrounded by more controversy over the past year than Herbalife Ltd. (NYSE:HLF).

As you might already know, billionaire Bill Ackman bet $1 billion that Herbalife Ltd. (NYSE:HLF)stock would fall, based on the theory that Herbalife was a Ponzi scheme. Billionaire Carl Icahn felt strongly that Ackman was mistaken, and he bet big on Herbalife’s stock appreciating.

While this battle is far from over, so far, Icahn has pocketed approximately $250 million, and Ackman has lost about $169 million. While that might be a lot of money, don’t shed any tears for Ackman. With more than 40% of the population being in the red, Ackman is doing just fine.

Nobody’s right, nobody’s wrong

Herbalife Ltd. (NYSE:HLF)Herbalife Ltd. (NYSE:HLF) might not be a Ponzi scheme, but many investors feel as though it’s a pyramid scheme. On the other hand, as long as the majority of sales are to consumers opposed to sellers, then it’s a kosher business from a legal standpoint. That being the case, Ackman might have used the wrong terminology and been a little too aggressive.

Interestingly, if he had presented his short argument in a different light, one that focused on a lack of sustainability without using the phrase “Ponzi scheme,” it might have been more effective. But we’ll never truly know the answer to that question and it doesn’t matter anyway. All we can do now is look ahead.

Bull vs. bear

Those bullish on Herbalife Ltd. (NYSE:HLF) can point to strong demand for the company’s nutrition, weight management, and personal care products. Its broad international exposure, (more than 80 countries), bullish option activity, strong cash flow, consistent revenue improvement, and 2.10% yield, don’t hurt either.  And of course, there’s the whole billionaire optimism thing.

Those bearish on Herbalife Ltd. (NYSE:HLF) don’t have to focus solely on Ackman. The National Consumer League has requested the FTC to investigate the company. They feel that Herbalife has unfairly targeted minorities, specifically the Latino community. Herbalife has already been sued five times, and that number is likely to grow.

Furthermore, according to NYPost.com, one of the company’s top sellers, Shawn Dahl, is leaving the company for Nutrie. This is after Herbalife Ltd. (NYSE:HLF) lost top-seller Anthony Powell earlier in the year. While these are only two individuals, their reach is significant. This top-seller exodus is a negative trend that has the potential to build momentum.

Other options

If you don’t want to gamble on Herbalife Ltd. (NYSE:HLF), then you might be tempted to consider GNC Holdings Inc (NYSE:GNC) or Vitamin Shoppe Inc (NYSE:VSI).

GNC saw revenue and earnings improvements last year, and it’s making an impact in China, which is the second largest economy in the world. GNC Holdings Inc (NYSE:GNC) has had exposure to the Chinese consumer for two years and done well. Now GNC has its first stand alone store in Shanghai, and it plans on opening 25 more locations in China by the end of the year.

Product diversification and innovation are good, as evidenced by the company’s recent launch of its Prevention Line, which will target various types of consumers. However, some concerns exist.

According to Alexa.com, GNC Holdings Inc (NYSE:GNC)’s online traffic has declined over the past three months. This could indicate a slowdown in sales. Another concern is the sale of sports nutrition supplements, which aren’t approved by the FDA. Safety concerns over some of these products have arisen over the years.

If a big story were to break in regards to an investigation of these products, it could hurt GNC Holdings Inc (NYSE:GNC)’s sales. Even if the above are false alarms, we don’t know how GNC would perform in a bear market, since it has never traded in a bear market environment.

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