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Kerrisdale Capital Holding Onto Herbalife Shares After FTC Probe

Stocks in this article: HLF

NEW YORK (TheStreet) -- Hedge fund Kerrisdale Capital Management isn't selling its shares in Herbalife (HLF) after the company said on Wednesday the Federal Trade Commission has opened a civil inquiry into the company's practices.

Sahm Adrangi, founder and chief investment officer of Kerrisdale, said the firm won't be selling any of its 230,000 Herbalife shares because it believes the company is worth over $100 a share in any regulatory scenario. Specifically, Adrangi pointed to Herbalife's international operations as a buffer against U.S. regulatory scrutiny, a thesis that mirrors comments made by Daniel Loeb of Third Point Management when the fund was briefly a Herbalife investor.

"It's interesting the stock is down only 8% on the news of the civil subpoena from FTC. I think the idea is that we'll finally put the regulatory issues to rest after the FTC investigation, although it may take a long time for the FTC to conduct its investigation," Adrangi said.

"Given that it's practically impossible for the FTC to shut down the company's non-US operations, this development will accelerate the time when the long-term fundamentals of the story will ultimately overshadow the headline risk concerns," Adrangi added.

"[S]ince my fundamental price target for the company remains $100+ under all regulatory scenarios, I can't justify it to myself to sell shares at these levels," the hedge fund manager concluded.

Shares of Herbalife, which were halted earlier today, were down 8.2% at $60.03 in mid-afternoon trading.

Those comments indicate some Herbalife investors are willing to continue to support the company amid accusations by Bill Ackman of Pershing Square Management that it is a pyramid scheme. The FTC's inquiry may be the most troubling development for Herbalife since Ackman unveiled a $1 billion short position in the stock in December 2012 and said the company's shares were worth $0.

Since then, investors as prominent as Third Point's Dan Loeb and Carl Icahn have taken opposing positions and ridiculed Ackman's attempts to undermine investor confidence in Herbalife. Dan Loeb quickly sold his Herbalife shares after taking a position in late 2012, however, Icahn built an over 16% stake in the company and was given seats on Herbalife's board of directors.

Icahn couldn't immediately be reached for comment on Wednesday.

FTC Inquiry

Herbalife disclosed on Wednesday afternoon that the FTC had opened a civil probe called a Civil Investigative Demand (CID) into the company and said it "welcomes the inquiry" and will cooperate fully with the regulator.

"Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC. We are confident that Herbalife is in compliance with all applicable laws and regulations," the company said.

"Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of its consumers for over 34 years," the Los Angeles-based company added.

A Pershing Square spokesperson declined to comment.

-- Written by Antoine Gara in New York

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