Bill Ackman’s Latest Herbalife Move Doesn’t Make Any Sense: Wall Street Pro

D.A. Davidson analyst, Herbalife, Bill Ackman: About an hour ago, MarketWatch’s the Tell reported that D.A. Davidson analyst Tim Ramey had a few words for Bill Ackman and his Herbalife (NYSE:HLF) short. The entire Pershing Square 2013 Q3 Investor Letter is uploaded on Insider Monkey, and in it, Ackman describes how he’s replacing about 40% of his short position with long-term puts on the company.

Regarding D.A. Davidson’s Tim Ramey, MarketWatch shared that he had this to say about Ackman:

“I would take my record on Herbalife versus Bill Ackman’s Herbalife record hands down.”

We’ve obtained a full copy of D.A. Davidson’s new report on Herbalife that holds a price target of $92 on the stock for the next 12-18 months; shares are currently near $69. D.A. Davidson’s five-year price target amounts to $120 a share.

One interesting aspect of the report is that it discusses what type of put options Ackman likely bought: out-of-the-money puts.

Here’s Tim Ramey’s thoughts on the move:

“Pershing likely bought out-of- the-money (e.g., $37.50 strike price, at half HLF’s current price) puts covering 10 million shares (100,000 puts if conventional 100 multiplier of listed puts) from a very lucky counterparty. We say lucky because it is highly likely that these puts will expire worthless and Pershing’s counterparty will get to pocket the price of the puts at a time when the implied volatility is at historically unprecedented levels.”

On the subject of Ackman’s reasoning behind the move, Ramey said that the “new bearish position seems at odds with Pershing Square’s goals,” adding, “If it truly still believes the go-to-zero thesis […] then it makes no sense to put a time element into this trade.”

Lastly, perhaps what investors would like to know the most, Ramey shares his thoughts on how the market may trade Herbalife after the Pershing letter. His thoughts on that:

“Clearly there is capitulation in these actions and that may well send Herbalife shares much higher – and there is the small matter of the remaining ~ 14.5 million shares that are sold-short by Pershing. We would anticipate that the volume will be huge in the next five trading sessions and the stock may very move much higher. We reiterate our BUY rating and $92 price target.”

Recommended reading:

Pershing Square 2013 Q3 Investor Letter

Disclosure: none