Is Bill Ackman Covering his Herbalife (HLF) Short Quietly? DA Davidson Opines

June 13, 2013 12:27 PM EDT
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Price: $53.30 +0.11%

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    6 Buy, 5 Hold, 1 Sell

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    Up: 13 | Down: 22 | New: 54
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DA Davidson analyst Tim Ramey weighed in on Herbalife (NYSE: HLF) Thursday after reviewing the latest short interest data.

Ramey notes that short interest, which at 37.2 million shares on December 31, fell recently to a "still-huge" 31 million shares on May 31st, down from 33 million shares on May 15th.

"The shorts have been buried in this position since the start of the year, with the stock up $12.50 plus $0.60 in dividends for a total return, year-to-date of 40%. That is before the 2.75% cost to borrow the stock," the analyst comments. "The short thesis has been thoroughly discredited and even on a day such as today, when a congresswoman asks the FTC to investigate Herbalife as a pyramid scheme, the shares are up. "

Ramey is wondering if Bill Ackman has "boxed" his short position.

"Pershing Square is thought to be short over 20 million of the 31 million shares shorted. Given Pershing Square's avoidance of any media regarding Herbalife recently, we wonder if it has been quietly unwinding its short – doing so while continuing its prior commentary on Herbalife might be conflicting – to tout a short at the same time that one is covering is tricky ground. Since 12/19/12, has Pershing Square, or any of its affiliated funds or investment entities, entered into any transactions that reduced in any way such Pershing Square entity's net short financial exposure to Herbalife? "

The analyst said an example of one transaction that would reduce Pershing Square’s net short exposure to Herbalife would be to sell deep in-the-money European-style put options to a counterparty, which would then buy HLF common shares in the open market to hedge its long put position.

"Under this example, Pershing Square could state that it had "not covered a single share of Herbalife" and thus appear to be short its original position," Ramey notes. "However, due to the short deep-in-the-money put, the net exposure to the Herbalife short would be reduced massively, if not entirely."

The analyst said news of the California congressperson asking for an FTC investigation is welcome.

"We already assume there is an open FTC investigation; and we are pretty clear on the facts that Herbalife is not likely to be closed down on a sole harmful FTC determination that Herbalife is an illegal pyramid scheme. Any other determination by the FTC would be viewed as positive (and closure) of the pyramid scheme drama. Is it possible the FTC could find something it doesn’t like about Herbalife’s marketing practices? We can envision a finding where “lead-generation” (which was done by third parties with Herbalife's tacit approval) is found to be coercive. The day the FTC puts forth a consent decree for Herbalife to 'cease and desist' from "lead-generation," is a day Herbalife’s stock would be up a lot. Even if it fines Herbalife say $50 million for doing so, the market would love such a determination. Be careful what you ask for. An FTC investigation is likely to result in a vindication of the business model."

The analyst reiterated a Buy rating and price target of $78 on HLF, calling it its Single Best Idea for 2013.

For an analyst ratings summary and ratings history on Herbalife click here. For more ratings news on Herbalife click here.

Shares of Herbalife closed at $45.27 yesterday.

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