Shares of Herbalife Ltd. (NYSE:HLF) have fallen over 38% since last Wednesday, amid reports that Bill Ackman, manager of the hedge fund Pershing Square Capital Management, is short the stock. Check out Bill Ackman’s full 13F portfolio here. The nutritional supplement company has been walloped by Ackman’s claims that it is a “pyramid scheme,” according to CNBC.
In the time since, we’ve seen a war of words between Herbalife and Ackman, which began shortly after the story surfaced last week. On CNBC, Herbalife’s CEO Michael Johnson called Ackman’s allegations “blatant market manipulation,” adding that “we want the SEC to take action.”
Johnson’s chief claim: “This appears to be another attempt to illegally manipulate the market by a group of short sellers.”
In a presentation last Thursday morning at the Sohn Conference Foundation in Manhattan, Ackman detailed his short thesis on Herbalife, breaking down his argument into four pillars. These pillars include: (1) questionable R&D practices, (2) mentions that Herbalife buys their credibility, (3) the assertion that around 90% of payments are incentive-based, and (4) evidence of bubble-like trends in multiple countries. See our full recap of his presentation.
During his subsequent media tour, Ackman shared more details about his research, and most notably, the size of his short position. In an interview with Bloomberg Television, the hedge fund manager discussed his short position in Herbalife, saying, “It is enormous. It is over 20 million shares…We are short over 20 million shares.”
In an interview with CNBC, Ackman said that he established the position “seven months ago, or so.”
This disclosure is crucial to understanding the full scope of the battle that’s shaping up between Ackman and Herbalife.
Continue reading to see just how…
Herbalife’s total short interest as of November 30th was 20.72 million shares, or 21.1% of the company’s outstanding float.
In the first two-week filing period of May, short interest in the stock nearly doubled from 6.34 million shares to 11.82 million shares. David Einhorn’s questions about Herbalife’s distributor disclosure policy, which prompted a selloff of more than 20% in the stock, occurred on May 1st.
The reason that this data is significant is because if Ackman’s disclosure that Pershing Square owns “over 20 million shares” is correct, it indicates that one of the two following scenarios must be true:
1) Bill Ackman is the only hedge fund manager initiating a short sale of meaningful size at the moment, and his 20M-share position was fully established by November 30th.
2) Bill Ackman’s 20M-share position was fully reached in the first two weeks of December, leading up to the Sohn Conference. If this is the case, then other short sellers are in the picture, but Ackman’s position dwarfs them significantly.
If scenario No. 1 is correct, rumors of short positions by David Einhorn (see Einhorn’s top stock picks) and Jim Chanos (see Chanos’ long-only positions), which have been making their way around the media, simply aren’t true.
Keep in mind that in April, the total short interest in Herbalife was between 5 and 6 million shares, which indicates that if scenario No. 2 is correct, the maximum size of the position held by other short sellers is about one-fourth the size of Ackman’s.
Considering the latter scenario, we have no way to determine who the other short sellers are, but it is obvious that other short sellers have much smaller positions. Obviously, this is assuming that Ackman’s position was taken in early May, which would line up with his CNBC interview.
So what about those pesky put options?
In Michael Johnson’s interview last Wednesday, the Herbalife CEO also said that “an extraordinary number of puts on our stock were due to expire” last Friday, the day after Ackman’s presentation.
Johnson added, “this activity was pegged at some kind of ‘significant event.’”
While we can’t discern who held the alleged puts, our database of hedge funds’ 13F filings indicates that Ackman, Einhorn, and Chanos did not hold any at the end of the third quarter.
Amid Bill Ackman’s statement that he will give his own personal profits to charity, his share disclosure tells us that the gains from his short position eclipsed at least $300 million after Herbalife’s close on Monday.
According to his presentation, Ackman holds a $0 price target on his short position; we don’t expect Herbalife’s total short interest to decline anytime soon.