Bill Ackman: "In My Career, I Have Not Seen a Less Attractive Risk-Reward Ratio Than a Long Investment In Herbalife Common Stock at Current Levels." - $HLF $JCP Watch

I'm still watching HLF/JCP (on the downside) because I want to see if Bill Ackman, founder of the $11 billion hedge fund Pershing Square Capital Management, ends up being right in the end even if he dumps all of his positions. I started to watch HLF/JCP at 4.73 when it was testing a trendline resistance level and when Ackman was about to dump his entire stake in JCP. After pulling back a bit, the ratio almost doubled when JCP got diluted by a secondary offering (chart below). So, for the ratio to win in the end, JCPenney must avoid bankruptcy and Bill Ackman must be right, or mostly right, about Herbalife.

Bill Ackman's Q3 letter was released on October 2, 2013 (see below). It looks he restructured his Herbalife short after getting squeezed (he covered some shorts and bought some OTC puts), but he still thinks HLF is going to zero! He's pretty darn confident that Herbalife is a pyramid scheme and will soon be shut down by regulators. After watching Ackman's presentation on Herbalife, I actually think he may be right in the end. Ackman also proved that Herbalife's products were overpriced based on comparables on Ebay.

HLF bottomed at $5.53 in 2009 and recently hit a high of $74.94, which was probably pricing in the possibility of a stock buyback. HLF also looks vulnerable at these levels if the economy were to contract (JCP as well).


Here are quotes from Bill Ackman's letter. Read the full letter below courtesy of the NY Post (h/t ValueWalk).

Since our presentation on Herbalife at the end of last year, we have not learned any facts that are inconsistent with our belief that the Company is a pyramid scheme that engages in unlawful and deceptive marketing practices. In fact, there have been a number of materially positive developments that increase the likelihood of regulatory intervention and the Company’s closure.

At yesterday’s closing price of $72.84, we believe the potential reward from being short Herbalife is extremely attractive relative to the risk of loss. Using the average analysts’ price target of $77 per share – which assumes that the Company is operating entirely legally – investors have less than 6% upside compared with 100% downside if the Company is determined to be a pyramid scheme by regulators.

In my career, I have not seen a less attractive risk-reward ratio than a long investment in Herbalife common stock at current levels.

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