What Has Two Thumbs and Loves Herbalife?

This guy!!  Well, “this guy” and Dan Loeb, who apparently has done quite well squeezing Ackman.  As  noted in our first post on the subject, we do not have a dog in this fight.  But we are having a lot of fun watching from the sidelines.  And after yesterday’s 10% rip in the stock, topping off an 80% bounce off the lows, we imagine that Caddyshack here, is now nicely in the money on his trade, so we are holding up our end of the bargain by sharing this uncomfortable looking golf finish with you today!  Charlie – my knees hurt just looking at this!

Pershing recently published a good summary of their Herbalife short thesis.  For those not particularly excited about spending a week reviewing all of the material they have made publicly available, you can read the overview here. Not to be outdone, Third Point discussed their new position in the stock in a recent quarterly letter, which is available here.  It’s safe to say that Loeb has made another great call here.  But I’m not sure that means Pershing is wrong. Yes, Herbalife has a “leading market position and steadily increases margins, earnings per share and free cash flow.”  And yes, “Herbalife has increased revenue at a double digit rate for seven of the past eight years,” since going public in 2004.  But Madoff’s performance record also looked pretty good since inception, and he successfully dodged a number of investigations up until the last one.  As they say, where there’s smoke, there’s fire.  And there has been plenty of smoke around Herbalife for years.  Time will tell.

We’ve got a lot of respect for Third Point and have followed their work for some time.  For shits and giggles, here’s a link to Dan Loeb’s Letters to CEO’s. Good stuff.  But this trade seems to be more about market positioning and capitalizing on a large short position made public, rather than an investment in a good business. Loeb will likely make another handsome profit from this trade.  He already has.  But at the end of the day, speculating in questionable businesses run by highly promotional  management teams is a recipe for disaster.  We can sleep much better investing the capital entrusted with us, with good people.