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Herbalife Ltd. (HLF), J.C. Penney Company, Inc. (JCP): Poor Ideas From a Known Investor

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Sometimes, truth takes some time to emerge. This is what Bill Ackman, the founder of Pershing Square Capital Management, says about two of his high conviction investment ideas that, so far, have gone sour. Ackman built a long position in J.C. Penney Company, Inc. (NYSE:JCP), which is down by 17% Year-To-Date (YTD), and a huge short position in Herbalife Ltd. (NYSE:HLF), which is up by 69% this year. Mr. Ackman is a superb value investor, but is there still some hope left for his money-losing positions.

Herbalife Ltd. (NYSE:HLF)

A failed turnaround that may become a success story

After the failed strategy put in place by J.C. Penney Company, Inc. (NYSE:JCP)’s former CEO, the Apple veteran Ron Johnson, the company is coming back to reintroducing discarded brands and distributing discount coupons. These efforts are being led by Mike Ullman, who returned as CEO after having led the company from 2004 to 2011. According to Ullman, Ron Johnson had shifted away from J.C. Penney Company, Inc. (NYSE:JCP)’s core customers: middle-aged Americans on tight budgets. Let’s see the most relevant highlights from Ullman’s strategy.

(1) Ullman has shored up the liquidity profile by securing a $2.25 billion term loan, guaranteed by the company’s huge real estate base. (2) The company is rolling out the Home shop-in-shops to 500 locations within the U.S. while implementing a more aggressive promotional strategy with a return of coupons (3) J.C. Penney Company, Inc. (NYSE:JCP) is bringing back inventory in key categories such as basics and historically successful private-label products (such as St. John’s Bay).
I believe in Ullman’s strategy and I am not alone since billionaire investor George Soros has taken a 7.9% stake in the company. Even though second-quarter sales might be weak, I think the company would finally re-emerge thanks to the come back of the historically proven strategy.

Hedge fund titans clash

Bill Ackman has, very publicly, taken a $1 billion short position in Herbalife Ltd. (NYSE:HLF). He maintains that the company is a Ponzi scheme that makes money through recruiting new distributors rather than through selling its nutritional shakes and pills. As a matter of fact, Herbalife Ltd. (NYSE:HLF)’s products do not appear in stores like most consumer goods products do. The company sells its products through a network of self-employed salespeople.

According to the company’s own statements, its direct selling method is a great way to reach customers cheaply. On Herbalife Ltd. (NYSE:HLF)’s defense, its method is widely used to push sales of low-value items such as kitchen appliances and cosmetics (think of Avon). In the words of Herbalife Ltd. (NYSE:HLF)’s CEO, Michael Johnson, “Ackman made a bogus accusation. We have millions of customers around the world. We don’t pay for recruiting. We have been in business for 32 years.”

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