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Watch Me Shoot Down Bill Ackman's Herbalife Bear Thesis

Stocks in this article: HLF BP HAL RIG AVP NUS BRK.B



As you probably can guess, I purchased the notes while others were full of fear.

To this day, that was my most profitable bond trade. I also traded shares/options of BP, Halliburton and Transocean, but my best risk vs. reward gains came from BP bonds. Fear of Herbalife collapsing has created favorable setups in options. In Real Money Pro, I posted a strategy using options.

Risk during the gulf spill was over-stated with BP and it's no different this time with Herbalife.

There are many network marketing companies operating in the United States. The largest companies include Amway, Avon (AVP), Berkshire Hathaway's (BRK.B) Pampered Chef, Nu Skin (NUS). They're not going away and they shouldn't.

Herbalife and the above-mentioned companies have global revenue streams. They primarily sell products, and while recruitment may result in a net gain, it's a sideline. Distributors buying products isn't a negative, much less evidence of wrongdoing; it demonstrates their confidence in the product and company.

Don't count on the FTC to end network marketing anytime soon, but if a regulatory agency entirely shut out Herbalife from the U.S. market, it would amount to less than an 18% loss of revenue. China represents another 10%. The rest of the world accounts for over 70% of sales. In the most extreme bearish thesis with other countries following suit and banning Herbalife as a result of actions taken by China and the U.S., the company may face a loss of 50%.

There you have it, the most extreme bear case where the wheels come off in two of the largest free market economies of the world results in an enterprise sustainable 50%. A drop in sales is already priced in.

In other words, it's one of my favorite covered call setups. Heads I win, tails I break even. Of course, I can lose, and any investment includes risk, but I'm more worried about a market crash causing a loss than Herbalife closing its doors.

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

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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