WHITNEY TILSON: I Am More Confident In My Herbalife Short Than Ever Before
Yesterday, Ackman presented a 250-plus slide presentation that he had billed as a "death blow" to Herbalife.
Ackman has been loudly and publicly short Herbalife for more than 18 months. So far, the short position hasn't played out in Ackman's favor and he's racked up hundreds of millions in paper losses.
Yesterday, Ackman gave what called "the most important presentation" of his career. However, shares of Herbalife's stock soared throughout his talk ending the day up 25%.
Despite the stock surge, Tilson writes that he's more confident in his short. Before, he thought there was a 63% chance of his position working out. Now he thinks his odds are 76%.
Here's an excerpt via [ValueWalk]:
To be short this stock (as I am), you have to believe two things:
1) That the majority (not all) of this company's operations are based on a pyramid scheme, false and deceptive marketing, etc.; and
2) That regulators will act to shut the company down or at least seriously rein it in.
On these two measures, I have more confidence in this investment now than I did before his presentation. To put rough numbers on it, before today I thought there was a 90% chance #1 was true and a 70% #2 would happen, so that's a 63% chance of this investment working out. Now I think the odds are 95% and 80%, meaning I think my odds have improved to 76% - so I'm perfectly happy to have a 25% larger short position (which the market took care of today - I didn't have to do a thing!).
The main reason for my increased confidence is that I think Ackman showed convincingly that nutrition clubs (which he estimates account for as much as 50% of Herbalife's U.S. business and nearly all of its incremental profits) are fundamentally not about genuine consumption of Herbalife products by people pursuing healthy lifestyles and weight loss (as the company would have you believe) but almost entirely by: a) Those pursuing the business opportunity (i.e., building a downline rather than real sales as, for example, Amway, Tupperware and Pampered Chef); and b) Their friends and family who are trying to support them.
And, critically, the business opportunity is being sold in a false and deceptive way in which mostly vulnerable, unsophisticated people are promised that if they just work hard and invest their time and money they are likely to become President's Club members and earn $500,000 annually forever. There is, of course, no disclosure whatsoever about how much time and money the average person invests, the real financial characteristics of the average nutrition club (almost all lose money), and the likelihood of anyone ever earning $1 in revenue, much less breaking even, much less earning enough money to make it worth one's time, and much less becoming a President's Club member (approaching 1 in 100,000).
In short, Ackman present voluminous evidence that Herbalife is aggressively selling millions of people a promise of the American Dream but is instead giving them the American Nightmare - bleeding them dry and discarding them. This is the very definition of fraud.