It is now announced that Senator Mackey of Massachusetts has written to the SEC and the FTC asking them to investigate HLF.
California Atty. Gen. Kamala D. Harris' staff has agreed to meet today Friday in Los Angeles with a coalition of critics who believe that Herbalife Ltd. preys on poverty-stricken immigrants with false hopes of easy money.
When you have predatory or activist short sellers, you can expect a public relations battle to begin.
Just as the lion kills its prey by grabbing the prey's throat in its mouth and squeezing off blood to the brain, a predatory short seller will gradually cut all supp0rt for its victim.
We have in HLF an interesting situation because the company's case is flawed at best -- 88% of its distributors do not make a dime, because the company has almost $800 million in EBITDA, and because we have an investor with relatively unlimited resources, Carl Icahn, buying up the stock with the intention of squeezing the lead short seller, Bill Ackman, with whom he has a grudge. Carl is an expert at using the media to publicize his investments.
We see the resources each side has, we can expect an excellent public relations contest.
The shorts, with almost 20 million shares short as of the end of the year, are probably pushing these latest two announcements.
In retaliation, HLF has said it is "eager" to address the Senator's concerns at his earliest convenience. This is a good reply by a competent staff that is used to defending the company and its business.
The shorts seem intent on recruiting powerful allies in the government, both in California and with two federal agencies.
As a short you want the attack vectors focused on the target. You want force multipliers from entities that are more powerful than your target.
These attacks come at a good time for the shorts as the stock seems to have been high priced even if its business model is a valid one.
Chart courtesy of Stockcharts.com
Thus we see a lovely move from over $80 to almost $60. I am sure the shorts are hoping this will start some momentum on the downside. No doubt they would like to panic and institutional holders into seeking a safer stock and one that is not accused of preying on the public. In fact I doubt that the stock will ever see $80 again. I believe the shorts will eventually bring it down but the battle will take years and be very costly.
What seems unusual to me is that the shorts would attack a company with billions in revenues and almost $900 million in cash to protect itself.
After all, lions, crocodiles and other predators all go after the weakest member of the herd, not the strongest. In war, you attack where the enemy is weak. You do not make a frontal assault on a heavily defended position.
As a short seller, you want stocks that tank fast after a big hit, not a long, drawn out expensive war.
There are many tools left for both sides to use. I believe it is a mistake not to use them all at once.
The power of Herbalife is that it can recruit new distributors. All this publicity cannot be helping. While it is good to try to recruit the government, to rely on that as your only attack is a big mistake as you cannot control it.
On the other side, the longs just seem intent on talking up their position. I do not see them directly attacking the shorts, other than making the price go up. As we saw this week, it is a mistake to rely only on this.
In a life or death battle, shorts only stop attacking when you are almost dead.
We look forward to being a spectator on this one.
