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.
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.
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.”
On the other side of the trade, we find the legendary billionaire investor Carl Icahn and his company, Icahn Enterprises LP (NASDAQ:IEP), which is up 61% this year and pays a 5.5% cash dividend. Icahn Enterprises LP (NASDAQ:IEP)‘s company initially accumulated a 12.98% stake in Herbalife, making his investment vehicle one of the company’s main shareholders. Apparently, he hasn’t sold a single share. These two amazingly smart investors can not be right at the same time. Herbalife is either a valuable company, as Icahn seems to believe, or it is a pyramid scheme, as Ackman claims.
Foolish bottom line
Bill Ackman is a wonderful value investor, but it looks like (no-one can be sure yet) these two positions (J.C. Penney Company, Inc. (NYSE:JCP) and Herbalife) can be counted as two major mistakes. Even if I think that J.C. Penney Company, Inc. (NYSE:JCP) should be rated as a “buy,” I am not sure it is worth the $75 per share Ackman says the company should be valued at. In the case of Herbalife Ltd. (NYSE:HLF), it is tough to make a call, but at the current valuation and given the doubts that surround the business, I would most definitely stay away from it right now.
Federico Zaldua has no position in any stocks mentioned. The Motley Fool has the following options: long January 2014 $50 calls on Herbalife Ltd. (NYSE:HLF). Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Poor Ideas From a Known Investor originally appeared on Fool.com is written by Federico Zaldua.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
