Members of Herbalife Ltd. (NYSE:HLF) have as much chance of success as they have of winning the lottery, while some make “false promises, claims, in hopes for product, for money, for recruiting, for customers, for pyramiding.” Though perhaps at home in a Bill Ackman speech beseeching investors and prospect members to avoid the nutrition company like Game of Thrones fans risking life and limb to avoid spoilers, these comments actually came from the man at the helm of Herbalife himself: Michael Johnson. According to The New York Post, a video shot in 2005 of the former The Walt Disney Company (NYSE:DIS) executive, who joined Herbalife in 2003, features Johnson apparently pressing his troops to improve practices, the clincher being that the CEO was making declarations people have become so accustomed to hearing from Ackman, the billionaire who manages the Pershing Square hedge fund who infamously made a $1 billion bet against Herbalife.
Herbalife Ltd. (NYSE:HLF) has been the subject of Ackman’s public scorn since 2012 when he made public that he had made the massive short on the company. Among Ackman’s claims is that Herbalife is a pyramid scheme, which is precisely what Johnson addresses in his 71-minute-long speech from the video, which took place in Laguna Beach, California. The New York Post, which says they have a copy of the video, writes that Johnson said that some of the strategies distributors used led recruits “down a false road” and resulted in complaints alleging the company is a pyramid scam. Furthermore, Johnson is quoted as saying: “You guys [have to] do things right because Rich [Goudis, then Herbalife CFO] and I have one major job […] to stay out of jail. We go to the gray-bar hotel together if you don’t operate with ethics.”
This may be taken by some as essentially the firm’s CEO saying that he has witnessed practices in his company that are problematic, to say the least. The question now is whether this new information could lead to Herbalife Ltd. (NYSE:HLF) sinking. It certainly has affected the stock, as it now sits down by 2.40% today. One thing is certain, hedge funds tracked by Insider Monkey were a lot less optimistic about Herbalife by the end of the first quarter. Heading into the second quarter, a total of 35 of the hedge funds tracked by Insider Monkey were long in this stock, a 5% decrease from the previous quarter. However, we see a slight bullish sign in the fact that the total value of their holdings increased 17.50% to $1.57 billion in the first quarter from $1.34 billion in the previous quarter, while the stock’s climb in the first quarter was a lower 13.42%.
At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically delivered a monthly alpha of six basis points, though these stocks underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning over 144% and beating the market by more than 84 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise rather than large-cap stocks.
Insider Monkey also follows insider sales or purchases of stocks to see whether members of a firm’s top management are confident in their company’s stock. With Herbalife, however, there were no sales or purchases of shares by insiders in the first half of the year. This leaves us with how hedge funds have traded the company in the first quarter, which we will discuss on the next page.