I didn’t plan to write this article today. I had hoped to write about EpiPens as I mentioned a couple of days ago. Unfortunately, once again, life intervened, so I’m pivoting to an article that is easier to write.
I ask that you please bear with me. I’m a little surly after spending yesterday responding to RainSoft’s legal discovery of my Yelp-like review here. It’s like this awesome true video:
… except imagine that everyone involved is from the 1800s and doesn’t know anything about photocopiers. That was my day… in my opinion*.
(By the way, if anyone wants to help me protect consumers please see this link.)
Sorry for the long introduction… let’s get back to the topic…
The best investment idea I’ve had in years, perhaps the in the entirety of this blog, is to short Herbalife ($HLF) stock… or perhaps buy puts on the stock.
Some will consider that a bold statement and it requires a bit of an explanation.
First, what is shorting a stock? I’ll let Wikipedia provide a better explanation than I could. What is buying “buying puts” on a stock? Again, I’ll defer to Wikipedia on the subject.
Essentially those two ideas are about making money by expecting the value of a stock going down.
In ten years of writing Lazy Man and Money, I never seriously considered betting a stock will go down. In full disclosure, I don’t even know if I have an account that allows me to do so (I think it may require a margin account). That should make it obvious, but I don’t have a position in Herbalife or a negative position in any other company. I might (and probably will) explore shorting Herbalife and/or other MLM companies in the future. The scale is likely to be weeks or months in the future, because, well, as I mentioned at the outset of this article, I’m fairly busy.
(I’m going to extremes on disclosures because of lawyers, such as Vorys, Sater, Seymour and Pease :: Attorneys-at-Scam… which is not my title or my article).
The Short Case for Shorting Herbalife
I haven’t done a “deep dive” into Herbalife like some other MLM companies, but I have written: Pyramid Scheme Questions Cause Herbalife to Lose 3 Billion Dollars, This Herbalife Story is Amazing, and Herbalife Settlement: Quick Reactionary Thoughts.
My opinion is that Facts About Herbalife has shown numerous cases of fraud. I believe that the FTC settlement with Herbalife agrees as they write:
“This settlement will require Herbalife to fundamentally restructure its business… Herbalife is going to have to start operating legitimately, making only truthful claims… and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.”
Some will ask why the FTC would “settle” with Herbalife given that statement that essentially calls them out for fraud. As a long-time FTC insider explains the FTC needs to sue pyramid schemes which take years and millions of tax-payer dollars. Perhaps the LA Times didn’t understand that, because they’ve asked why Herbalife is even allowed to conduct business. Perhaps the LA Times’ writer did understand it but he wanted to emphasize the absurdity of the situation.
I believe that Wall Street has its head in the sand.
This is the second time that the FTC mandated an MLM company to make changes to “operate legitimately.” The last time was Vemma about a year ago. What happened? You should read this Truth In Advertising retrospective on Vemma where the company has lost millions. The CEO has thanked people for continuing to buy its products because, in his words, “you have no idea how badly I needed your help and need, still need your help today.”
My understanding is that Herbalife will be forced to make similar changes that Vemma had to make. I believe that starts in May 2017. I don’t think Wall Street understands what has happened to Vemma… perhaps because Vemma isn’t a publicly traded company.
I think that the FTC settlement will essentially suffocate Herbalife like it did with Vemma. I think the FTC moved towards this settlement because it is a lot of quicker and easier then spending a decade in court debating on what a pyramid scheme is. I think Herbalife agreed to it, because they weren’t in a position to argue for anything better. This way they can at least buy some time.
In my opinion it is EXTREMELY notable that Herbalife didn’t just say, “We’ll put our products in stores and avoid this MLM/pyramid scheme mess.” I can’t imagine a legitimate company with legitimate products at fair pricing points, not embracing that. It seem to be common sense and I think a 5th grader could grasp the concept. However, if I were a company operating a pyramid scheme, I would probably fight tooth and nail to remain that way and avoid putting my products in a competitive free market situation. It seems that Herbalife is embracing that second path.
I don’t see how this is going to end well for Herbalife. I think investors can take advantage of that.
* I’ve decided to include the words “in my opinion” in my articles involving scams or lawsuits in the future. (If I forget to include these specific words readers, agree to acknowledge this disclaimer.) I thought that this was understood, as this entire blog is about my opinion on things. It seems that lawyers like to argue otherwise. While in disclosure mode, I should upgrade my previous mention of “a little surly” to “very surly.” Fair?
Can we give a little credit to Bill Ackman for shorting Herbalife stock in style first? It’s only fair since he made it public and shorted a billion dollars worth of stock.
Sorry the lawyers are still giving you so much heck. It sounds like they have the Descartes strategy of destroying all common understanding, and to pretend that we don’t have any assumed knowledge. That is truly annoying, and I dealt with a similar issue recently as a person tried to define “quality” of an MLM supplement. To say these people are obtuse would probably be an understatement, and you are right to be surly!
Lazy Man says
We can give Bill Ackman a TON OF CREDIT. When I met him a couple of weeks ago, I profusely expressed that to him. I also linked to his company’s website Facts About Herbalife in the article and tried to explain how the FTC agreed with him.
I love your mention of Descartes. It’s a little known fact that I loved my philosophy classes in college and considered it as a 3rd major.
Evan @ Building Income Investments says
The market can stay irrational longer than you can stay solvent…I say go with the puts. You can buy Jan 2018 puts and lock in your “costs.”
Lazy Man says
The market in general, I believe. I’m not sure if a company’s stock prices will remain irrational very long as their revenues tank.
Jan 2018 might be a little early. If the restrictions are coming in May 2017, it could take a few quarters or a year for it to filter through and hit the financial reports. They may also ramp up operations overseas to offset the loses in US.