This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Herbalife's Shorts -- Hey Bill Ackman! -- May Be Twisting in the Wind Soon

Stocks in this article: HLF NUS AVP TSLA

The most significant income difference I can find between Herbalife, Nu Skin, Avon and real estate/insurance sales is the bigger upside potential with network marketing.

Unless the entire independent contractor model becomes regulated out of existence, it's reasonable to assume the worst-case scenario is reduced revenue and income, and not Ackman's price target of zero. We know what happens when numerically superior, organized and well-funded organizations become politically united. Think of Herbalife, Avon and Nu Skin's marketing network as equivalent to car dealers in the automotive industry.

In New Jersey, car dealers stymied Tesla's (TSLA) efforts to sell cars directly to consumers, bypassing the traditional car dealer model. Think of Ackman as Tesla and the various network marketing independent agents as car dealers.

In a political battlefield, anything is possible. But if you're not factoring in Ackman as the underdog here, you're not considering all the moving parts.

Time is Ackman and the many short-sellers' enemy. Herbalife's short interest is over 20%; meaning, over one out of every five shares traded is borrowed in order to short. Not including borrow costs (fees charged for the privilege of borrowing shares to short), shorts must also pay what's known as "in lieu of" for dividends.

The current dividend yield is 2.4%, and a falling share price means a proportionally higher short carry cost. What does a high carry cost combined with a massive short interest have to do with an FTC investigation? The FTC may come down hard on network marketing companies and the shorts may still lose.

Imagine in a few months that new and stricter rules are put in place in negotiated settlements between government regulators and companies. Also, imagine that, as a result, the market consensus reduces Herbalife's top and bottom lines by 50%. Extreme, maybe, but follow me for a moment.

Herbalife loses the headline risk and the forward earnings multiple shifts from about 8.5 to 17 at the current valuation. The dividend should remain safe with less than a 50% payout. What do you think will happen if the shorts receive what can only be considered a major win from an unbiased observer?

Herbalife's shares will rocket higher from a massive short squeeze. The rocket's fuse becomes lit when the headline risk is removed and new investors are willing to enter chasing value and yield. Anything short of total destruction for Herbalife results in losses for the bears.

I'm comfortable shorting, and the majority of my trades are shorts; however, Herbalife isn't a short candidate for me and, in fact, the headline risk is already fully (and beyond) priced in.

The smart play remains a long position, and in particular a long bias that is short volatility is optimal.

At the time of publication, Weinstein had no positions in securities mentioned.

Follow @RobertWeinstein

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

2 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs