Herbalife Ltd. (HLF): Does Ackman Want This Trade Back?

Page 1 of 2

If you’re looking for a comeback stock to invest in, look no further than Herbalife Ltd. (NYSE:HLF). The company has endured criticism from one of the market’s most revered hedge fund managers. Perhaps any other company would have faltered, taking years to recover, if it could at all. However, there’s just something about Herbalife and its resiliency that is allowing it to do some chest pounding in the wake of accusations that could have brought it to its knees.

Wrong On This One

Herbalife Ltd. (NYSE:HLF)

If you’ve followed the developments with Herbalife Ltd. (NYSE:HLF), you know that the hedge fund manager I am referring to is Bill Ackman. The founder of Pershing Square Capital Management announced in December that he was shorting Herbalife to the tune of $1 billion after deeming its business model to be a pyramid scheme.

Well, in a classic case of the chickens coming home to roost, Ackman’s trade is now working against him. Not only have government regulators not stepped in to back up his pyramid scheme claim about Herbalife Ltd. (NYSE:HLF), but investors are buying the company’s stock like crazy. The Securities and Exchange Commission’s enforcement division has opened an inquiry into Herbalife, according to The Wall Street Journal. However, nothing has come of it to date.

After Ackman’s pronouncement in December, the stock sold off sharply, closing one day at $26.06. However, now Herbalife is trading at the levels it enjoyed before Ackman’s pronouncement. In fact, it is closing in on its 52-week high of $56.39.

Catalysts for Herbalife

The most recent news that helped to propel the stock’s upward movement came on Tuesday when Herbalife Ltd. (NYSE:HLF) announced that it had hired PricewaterhouseCoopers (PwC) to audit its books. A scandal involving its previous auditor, KPMG, came earlier this year, forcing the accounting firm to quit.

Specifically, PwC will be reviewing Herbalife’s consolidated financial statements for the fiscal years ended Dec. 31, 2010, 2011, and 2012. It will also review the company’s condensed consolidated financial statements for the first quarter of 2013.

Quickly hiring a new auditor that will immediately begin re-auditing the company’s financial statement’s bodes well for Herbalife. On Tuesday, the day of the new auditor announcement, the volume of shares traded for Herbalife was exceptionally high. Its average daily volume is 2.8 million, but on Tuesday, it was 10.8 million.

Mother of All Short Squeezes

All of this has set the stage for Ackman to incur huge losses. He confidently boasted that he had shorted more than 20 million shares of Herbalife in December. Then entered Carl Icahn, who questioned what in the world Ackman was thinking. Never one to mince words, Icahn called Ackman’s position as helping the stock become “the mother of all short squeezes.” Icahn also backed up his confidence in the company with a trade. He

Also noteworthy is a finding by Bloomberg that Herbalife is the 11th most-shorted company in the Russell 1000 Index. Its average short interest is 3.1%.

Page 1 of 2