Carl Icahn has bought an additional 2.3 million shares of Herbalife Ltd. (NYSE:HLF) since March 5th, bringing the total number of shares in his portfolio as of the most recent SEC filing to 16.4 million (research more stocks Icahn likes). Icahn famously challenged public Herbalife short (and fellow billionaire) Bill Ackman on CNBC earlier this year before revealing his own stake in the company. Ackman had given a presentation in December arguing that Herbalife is a pyramid scheme and that the shares would go to zero; his Pershing Square held a large short position in the stock at the time (see Pershing Square’s latest long picks). That presentation brought the stock price from above $40 down to $26 before fully recovering in mid January, dropping to $35 in early February, and then rising a bit back to around $40 again. Icahn has announced that he plans to explore a number of strategic options with Herbalife management, including a takeover.
If Herbalife Ltd. is a pyramid scheme, Ackman argued, then over time distributors will leave the business forcing the company to continually find new markets (he mocked Herbalife for expanding its business- known for weight loss products, though it does also provide nutritional and supplemental products- into Ghana). In addition, the U.S. and other governments might shut down the company within their borders. The bullish case has been that the stock currently trades at 10 times trailing earnings, or value levels; that revenue and earnings have been growing, rising at double-digit rates last quarter compared to the fourth quarter of 2011; and that even the U.S. is not a particularly large market limiting the downside from any shutdowns. Icahn has offered the prospect of a buyout but we are skeptical that lenders would finance a deal as long as there is any chance of the pyramid scheme thesis playing out.
