Loeb Versus Ackman – Sharks Eating the Sharks….

If you’re not familiar with what’s going on with Herbalife stock these days you’re missing out.  I don’t generally pay too much attention to individual stock stuff, but this is shaping up to be one of the great modern investment battles.

In one corner, you’ve got Bill Ackman who runs Pershing Square Capital, a $11B fund that is involved in primarily activist investing. Ackman very publicly attacked Herbalife in recent weeks stating the company was a pyramid scheme and worth $0.  Yes, zero.  Ackman’s fund has reportedly taken a 9% stake in the company on the short side.

Enter Dan Loeb.  Loeb is the founder of  Third Point, a $10B fund specializing in…activist investing (among other strategies).  Loeb has reportedly taken a 8.2% position in the stock citing a $60 price target.  In other words, Loeb is essentially taking the other side of Ackman’s bet.

What’s so interesting about this battle is not only that these are two of the most high profile hedge fund managers in America, but that they both like to put on a show.  Loeb is well known for publicly lashing out at executives who don’t perform in-line with Loeb’s expectations.  Ackman is a bit less public, but put on quite the spectacle with the recent Herbalife presentation.

I have to admit that I think the public attack on Herbalife felt all wrong from the start.  Not that I think Ackman’s position is wrong.  I have no idea – micro is not my expertise.  Herbalife could be a pyramid scheme as he claims.  But I just didn’t like the very public assassination of the company and the big show that was put on.  It all appeared very odd.  Particularly when one considers the huge options trades that were made right before the presentations (which are now the subject of an SEC investigation).  It just felt all wrong to me.  The timing was odd, the presentation appeared intentionally malicious, etc.  It just felt like hedge funds contributing to society in a way that was largely void of value….That’s just my personal feeling around the whole thing.  I could be totally wrong.

But now we’ve got the sharks eating the sharks. We’re talking about one of the great investment battles that will ever play out in real-time.  Someone’s fund is going to take a huge hit due to this one position.  It’s extremely unusual to know who is shorting a stock.  It’s even more unusual to know that one high profile investor is directly taking the other side of the trade.  I don’t know who is going to be right.  But it will certainly be fun to watch.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • SS

    Loeb’s letter is great. He basically says Ackman is full of it.

    http://www.scribd.com/doc/119672459/Loeb-HLF

  • Pierce Inverarity

    Kid Dynamite did a takedown of this earlier, with really nuanced analysis. At the end of the day Loeb is probably going to win the battle. And with shorts, winning the battle means more than winning the war.

  • http://www.orcamgroup.com Cullen Roche

    Wow, that one got by me somehow. Great read here by KD. Thanks for pointing it out.

    http://kiddynamitesworld.com/why-bill-ackman-is-wrong-about-herbalife/

  • hangemhi

    Pierce – do you have a link?

    FWIW I tried to sell a supplement for a company with a similar model. Multi level marketing (MLM) has its flaws, and I won’t ever try it again, but it isn’t illegal. I could write a book on what I learned – the good, the bad and the ugly. But I would bet my life on Herbalife having zero chance of going to zero. These kinds of companies get attacked all of the time, often with good reason, but the ones with staying power have good lawyers who know how to keep their distributors in check enough to stay legal. My old firm is still in business, and I still buy the product and love it – and that is why it isn’t a ponzi scheme even though only a few at the very top will ever make a living off selling it

  • hangemhi

    oops, got it, thanks Cullen. I’m half way thru and he’s got it. The bottom line is you earn off of product sales rather than membership fees, the structure is legal. I researched this stuff thoroughly (about 6 or 7 years ago so I’m a little fuzzy) and found plenty of examples of pure ponzi schemes – you got paid out of the membership fees whether there even was an end product, or if there was a product they didn’t actually have to sell or consume it since it was all about recruitment. Technically you could say Herbalife and my old firm were all about recruitment, but you had to recruit people who actually bought the product otherwise you earned nothing. So Herbalife is safer than safe in it’s legality unless US law is changed, which is on no one’s radar.

  • hangemhi

    I’ve since read the comments section – amazing discussion with actual experts there – made me less “fuzzy”. The bottom line is there must be a desirable product, which I’m sure herbalife has (it doesn’t have to be the best, or the cheapest or make logical sense ($4 for Starbucks coffee? $2 for water you can get from your tap? Xtenze?). Sure the distributors largely join hoping they’ll strike it rich, but if most of them only join that particular MLM because they believe in the product too, the MLM is going to pass legal tests.

  • Pierce Inverarity

    Agreed. Personally, I’m of the mindset that MLM companies are shady, at best (why not franchise, or distribute via the regular channels?), but the fact of the matter is, it’s a grey area for the each reasons you outlined. If it’s a desirable product that (perhaps) mostly distributors consume, it is not a Ponzi scheme. Does it seem a big drug cartel-ish? Maybe. But what they’re selling isn’t illegal and isn’t any less socially useful than a McDonald’s franchise or the Green Bay Packers (check out their shareholder structure!). I’d wager Ackman is quickly hedging his bets here. Plus, as KD pointed out, the timing of Ackman’s presentation and material position disclosure going to set off some serious regulatory alarms.

  • ES71

    Well, having seen what Herbalife did to some of my desperate unemployed friends back in Russia in the 90s, I can say I pretty much hate them.
    It is a pyrmid of a human sort – the person on the top of pyrmid, the early distributor has an army of late joiners under him/her who work for peanuts making him/her rich on commisions and such.
    They are a horrible company that brainwashes people.

    Anyone in the US who had been sucked into buying a timeshare at 3-4-5 times of what it costs on the open market will understand what I am talking about.

    All these companies employ physological pressure tactics and even some hypnose. It shouldn’t be legal to do that to people.

    SO, in this fight I am definitely on Ackman’s side.
    Dan Loeb is counting on short squeeze, nothing more nothing less. We will see.
    I think Herbalife will not bear the scrutiny. Such companies best operate in the shadows.

  • jaymaster

    If what Ackman did wasn’t illegal, it should be. Nothing wrong with shorting, even shorting big.

    But to short big, and then basically go on a roadshow telling everybody that you shorted big and you intend to bring the company down, well that sounds like text book pump and dump, but in reverse.

    In fact, it’s actually worse than pump and dump, because the very fact that you announced your short is an act that in and of itself could (and did) take the stock lower.

    If it’s not illegal, I hope he at least loses his ass on this deal.

  • ES71

    How is it different from TIlson with Netflix? And he ended up losing something like 50% on it?
    Shorting is very hard because people on the other side ( like Loeb in this case) will try to squeeze you. And since markets have natural upward bias ( from inflation) it is much easier to do.

  • Adam2

    Excuses for a terrible business model and product. Pyramid schemes are legal if they keep on recruiting.

  • http://www.jasondacruz.com Jason D

    That’s ridiculous — if you take a position in a stock, you feel that it is mispriced. Mispricings come about — at least in part — due to information issues: distortion, shortage, or otherwise. In order to see your thesis come true, why wouldn’t you try and get that information out?

    If HLF is any indication, this sort of grandstanding is much better than the usual Wall Street rumor mill. Ackman laid out his thesis and it has come under fire (HLF is right around its price level before his presentation). What could be more healthy for markets?

  • jaymaster

    Well, there’s actually a name for it already: short and distort.

    http://en.wikipedia.org/wiki/Pump_and_dump

  • hangemhi

    ES71 – i don’t disagree with your negative view of MLM’s, except that it still is legal. Firstly, everything is a pyramid. Starbucks’ CEO makes roughly $20,000 to $25,000 per hour $50M per year lately), a Barista makes $9 an hour ($18k a year, or less than one of Schultz’s hours). There are maybe 50,000 Barista’s and only 1 CEO. All companies are like this, and it has only gotten worse in recent decades with the top making obscene sums and the avg worker living with roomates and can’t afford their own products.

    The diff btwn an MLM and a regular corporate pyramid like Starbucks is that no one promises Barista’s they’ve got a real shot at Schultz-like pay. So yes, there is “brainwashing” of a sort with the high earners doing presentations around the country telling stories about how they were just like you starting out and you can do it too, never mentioning that you’re statistical chance is about as likely as a Barista becoming CEO. HOWEVER, that info is available – there are all kinds of regulations around what they are allowed to say and do, and that actual compensation stats have to be listed. So again, it is easy for an MLM with good lawyers and a vigilant mgt team to keep the company within the letter of the law. I don’t know Herbalife at all, but I’d still bet anything they will pass the legality test and Ackerman’s $0 prediction is a joke

  • BHB

    I asked myself a few questions. Have I ever tried the product? Do I know anyone that works for the company? Do I know anyone that uses their product (after a blast e-mail the answer was no)? Will Herbalife be around in 10 years? (maybe) Bottom line: this looks like you really have to spend months researching this company to truly figure out their business model and then extrapolate an intrinsic value after affirming their accounting is legit. I tend to stay away from stocks when two titans are battling it out and the ones I don’t understand or see the need for them to be around. Ackman’s presentation was extremely detailed and Loeb’s response was classic. This should be fun!!!

  • jaymaster

    I was tempted to go long after I read the Ackman presentation, but I thought better of it. I’m trying to do less speculating and more investing these days. It will be interesting to see how it plays out.

    My high school physics teacher was a Herbalife distributor/evangelist. Even then, I thought it was a bit dubious. But I just got notice that my 30th high school reunion is this year, so they have at least survived a long time!

  • Mike Bell

    I disagree completely. Why are only longs allowed to hype a stock? The entire financial media is one giant hype machine. Why is it ok for Ackman to put on a presentation about why he thinks a stock is undervalued and a good buy – but not the opposite? I think the issue is whether or not they are being truthful in what they are presenting. In this case, we have two heavy hitters who have the same info available to them yet have arrived at a different conclusion. I see no problem with that nor either man making public his views and positions.

  • Mike Bell

    Don’t forget, it is quite possible for both of them to win (at different times). If Ackman has enough financial strength to see it through, I think he will ultimately be a big winner. In this case, it might have to be a long-term short. Tilson gave up his NFLX short at exactly the wrong time. He lost his nerve. Then he went long. lol. That’s the stuff amateurs do. I was short a bunch of puts on NFLX when it was over $200. I got stopped out and lost. It went to $300 and then a few months later it was under $100. I didn’t have the resources to withstand being short at $230 and hanging on when the stock went all the way to $300. Had I been able to withstand the loss, I would have just a few months later had a nice win.

    If Ackman’s position really is 9% of his AUM, then he won’t be able to hang on if this thing doubles. If the longs can force his hand, his covering will propel the stock bigtime.

  • Andrew P

    It sounds a lot like Mona Vie. A desirable but overpriced product that is distributed through personal contact rather than regular retail. The distributors who make money are the ones who have personal contact with lots of people in their other lines of work (like massage therapy or dog walking) and are able to sell the product to those customers.

  • InvestorX

    It sounds that Ackman is right in spirit, Loeb is right about the letter of the law. So Loeb seems more likely to win.

  • http://www.jasondacruz.com Jason D

    Did you read that link?

    “involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price”

    Keyword: artificial.

    If Ackman’s claims were false and intentionally misleading, that would be illegal. What he’s actually doing is not.

  • Dave Cearley

    A hedge fund manager’s primary attack against Herbalife is that they make their money using the greater fool principle. Now THAT’S cognitive dissonance!

  • Old Dog

    Well – we are certainly on the same page as far as your comment: ” It just felt like hedge funds contributing to society in a way that was largely void of value…” That comment applies to all hedge funds very existence.

    On another level this is just a slightly higher profile version of the Wall Street Racket that dominates the financial media every day.

    Churn baby, churn.

    The casino prospers.

  • Jim

    Well, it should contain the unemployment rate among loyyers, at least.

  • Michael Mangrum

    Shady? Because you buy it from an individual rather than in a store? Really?

  • Michael Mangrum

    The funny thing is that even if stock price goes to zero, Herbalife will probably still be in business, and it won’t need bailout money to do so.