Bill Ackman is also currently engaged with J.C. Penney Company, Inc. (NYSE:JCP), and was responsible for instituting Ron Johnson, a former Apple executive and the ex-CEO of J.C. Penney, who largely failed.
J.C. Penney stock is down over 50% in the past year. Johnson tried to end the department store sales and have J.C. Penney Company, Inc. (NYSE:JCP) offer continuously low prices. This caused consumers to flock away and led to double-digit drops in both same store sales and online sales, which is why he was replaced by the old CEO.
While George Soros has bought up a 7.91% stake in J.C. Penney Company, Inc. (NYSE:JCP), and Goldman Sachs has given the company a $1.75 billion loan to keep it going (it only has $930 million left and is hemorrhaging cash), it still knew to undo all, or at least most, of the overhauls that Ron Johnson put in.
This has two possible implications. One, Ackman might have to devote less time to bashing Herbalife, as he tries to turn around J.C. Penney for the second time. Ackman has lost several hundred million in J.C. Penney and will have to cover those losses somehow. The other possibility is that, since Ackman bought a stake in J.C. Penney, its stock has done very poorly, so why trust him on Herbalife?
If the regulators decide not to pursue any action, then Ackman will have to exit his short position in Herbalife, and this will cause an enormous short squeeze, propelling Herbalife upwards. The question is, how long can Ackman sit on his short position before he decides to pull the trigger, take his profit, and walk away? His investors aren’t going to be happy if Herbalife Ltd. (NYSE:HLF) slowly trends upward and its profits erode away as J.C. Penney continues to lose cash.
I think that all MLM companies, like these three that operate and sell similar things, are undervalued and are trading at a discount due to regulatory worries. With Bill Ackman having two major battles ahead of him, it will be hard for him to keep pushing these stocks down, while also turning around a failing retailer and keeping Pershing Square investors happy.
Herbalife continues to outperform on a fundamental level, even as all these pressures continue to weigh heavily on the stock, and is worth a look by any investor who likes dirty value stocks.
The article The “Pyramid” Scheme Continues To Outperform originally appeared on Fool.com and is written by Callum Turcan.
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