Herbalife Ltd. (NYSE:HLF) has had a wild ride over the past three weeks. On the afternoon of December 19th, news surfaced that Bill Ackman, manager of Pershing Square Capital, was short-selling close to 20% of the stock’s outstanding shares. In the next three and a half days of trading, HLF lost a little over 38% of its value as investors learned more of Ackman’s allegations that the company was a “pyramid scheme.” The stock has, however, bounced back from a Christmas Eve low under $25 a share and now trades just 2.5 percentage points off its December 18th closing price.
Keeping this in mind, much of the positive momentum in Herbalife’s stock price can be attributed to two things: new support from other key players in the hedge fund industry, and serious efforts by the company itself to combat Ackman’s allegations. Regarding the latter, Herbalife Ltd. (NYSE:HLF) has hired notable investment bank Moelis & Co. to serve as an advisor, and it has also put prominent law firm Boies, Schiller & Flexner in its corner.
In terms of support from the smart money, Robert Chapman, manager of Chapman Capital, announced on December 29th that he had close to 35% of his portfolio in the stock. The NYPost also reports that Carl Icahn is “believed to have taken a long position in Herbalife.”
Yesterday (January 9th), Daniel Loeb and Third Point revealed that they hold “about 8% of Herbalife outstanding stock,” adding that it was “acquired mostly during the panicked selling that followed the short seller’s dramatic claims.” Here’s a full look at Loeb’s Q4 investment letter.
Moreover, Loeb explained his bullish thesis on Herbalife, mentioning that the company has “consistent top-line growth,” is a market leader, and sports generally attractive earnings growth. It’s worth noting that over the past five years, Herbalife has grown its EPS by an average of 28% a year, and over the next half-decade, the sell-side expects annual growth of 15-16%.
From a valuation standpoint, shares currently trade at a forward P/E of 8.7x, and Loeb mentions that “applying a modest 10-12x earnings multiple suggests Herbalife’s shares are worth $55-$68.” At the time of this writing, shares are trading close to the $41 mark. While there’s no telling where this stock will go in the short run–with a bevy of drama to still play out between the company’s legal team and Ackman–Loeb’s reasoning is sound.
In addition to Herbalife Ltd. (NYSE:HLF), the fund manager’s Q4 letter also mentioned three other companies in particular: Murphy Oil Corporation (NYSE:MUR), Morgan Stanley (NYSE:MS) and Tesoro Corporation (NYSE:TSO). Let’s take a brief run through each position, shall we?