Herbalife Defenders Get Personal With Ackman, Shorts

NEW YORK ( TheStreet) - In defending 'Buy' ratings for Herbalife ( HLF), Wall Street analysts are getting personal with William Ackman, the head of Pershing Square Capital Management, who's just unveiled a 334-page presentation on why he feels the supplements maker is a pyramid scheme worth $0.

Notably, in the wake of Ackman's presentation that Herbalife is a multi-decade pyramid scheme, analysts at Cannacord Genuity and B. Riley & Co. are comparing the sometimes activist investor to Barry Minkow, a convicted fraudster who was previously the company's most vocal short in 2007 and 2008.

Meanwhile Timothy Ramey, an analyst at D.A. Davidson & Co., argues Ackman doesn't understand the popularity of Herbalife's weight loss products because he hails from Chappaqua, N.Y., an upscale New York suburb that may be sheltered from the health concerns of the ordinary public.

Currently, Minkow, who also was a vocal critic of multi-level marketing company Nu Skin ( NUS), is serving a 5-year prison sentence for conspiring to manipulate the stock of homebuilder Lennar ( LEN)

Ackman has caused an over 35% stock drop in Herbalife after disclosing to CNBC on Dec. 19 that he is short the company's shares and feels its multi-level marketing arrangement is more of a fraudulent pyramid scheme than a multi-billion dollar retail business.

Herbalife chief executive Michael O. Johnson took to the network's airwaves shortly thereafter to mount a vigorous defense against Ackman's allegations and called the short position "market manipulation," but he was unable to stem share losses that continued on Thursday as Pershing Square detailed the investment at the Ira Sohn Conference. "Herbalife is not an illegal pyramid scheme," the company said in a Thursday statement.

The company also said on Friday it will conduct an analyst day on the week of Jan. 7 to respond in detail to "the distorted, outdated and inaccurate information contained in Pershing Square's presentation." While Herbalife appears to be mounting a defense to Ackman's short, its shares continue to drop, falling over 19% in Friday trading.

What's interesting is how little weight analyst 'Buy' ratings and multiple defenses of Herbalife share recommendations have had on markets in the wake of Ackman's presentation. Meanwhile, personal attacks against Ackman stand out, given the hedge funder's otherwise strong market reputation. Ackman's recently won proxy a battle against Canadian Pacific ( CP), participated in the IPO of Burger King ( BKW) and led a still-uncertain overhaul of J.C. Penney ( JCP).

"The public allegations are the challenge to investor sentiment rather than a realization of an argument that the business model isn't sustainable," writes Cannacord Genuity analyst Scott Van Winkle, in a Dec. 21 note to clients addressing Ackman's presentation.

"The last aggressive short-seller, Barry Minkow, argued five years ago, with just as great a level of detail and equal vigor, that this business model was unsustainable. Five years later, Minkow is in prison for securities fraud and Herbalife sales are nearly double the prior level," adds the analyst, who maintains a 'Buy' rating and $76 a share price target.

Van Winkle notes that the business has survived previous scrutiny, including a Securities and Exchange Commission inquiry into the validity of companies with multi-level marketing arrangements. "We see no question as to whether Herbalife offers significant value at current levels. The question is when the catalyst will materialize to change the sentiment," Van Winkle adds.

B. Riley analyst Linda Bolton Weiser echoed a similar tune in the wake of reports of Ackman's short trade and his Thursday presentation.

"When short seller Barry Minkow attacked Herbalife in a Nov. 2007 report, the stock dropped 11% on one day, then proceeded to rise to a new high in April 2008," the analyst wrote. " Herbalife did take legal action against Barry Minkow and later settled with him," adds Bolton Weiser.

While Herbalife CEO Johnson said on CNBC the SEC should look into Ackman's short presentation, there's no public indication of any legal action brought by the company as of yet. In a Bloomberg Television interview, Ackman said he would welcome a lawsuit.

Other's weren't just content to compare Ackman's short trade to that of Minkow, who's been convicted, in separate prison sentences, for running a Ponzi-scheme and for market manipulation.

"We are certain that regulators will review the Pershing Square materials closely but we are highly skeptical that Ackman has exposed anything that is remotely close to a smoking gun," writes D.A. Davidson analyst Timothy Ramey, while noting that many details from Ackman's presentation dated as far back as 2000. Meanwhile, Ramey took a personal tone to Ackman's critique of Herbalife's products.

"Ackman dismisses, at his own peril, the fact that Herbalife is a premium product that is consumed daily by a very loyal and growing population of people who are concerned about diet and healthy living. They may not look like the people Mr. Ackman knows in Chappaqua, but they are out there, and in growing numbers; weight loss is becoming a growing industry," writes the analyst, who maintains a 'Buy' rating and $72 price target.

On a more fundamental basis, Bank of America Merrill Lynch analyst Christopher Ferrara and Bolton Weiser of R. Riley argue Herbalife has the financial flexability to launch a large stock buyback, which might drive earnings per share growth. Ferrara, for instance, highlights that Herbalife is authorized to repurchase $1 billion in stock, or roughly 24% of the company's shares outstanding, in a Dec. 21 note to clients.

Clearly, in squaring off in public presentations, Herbalife CEO Johnson and Pershing Square's Ackman are putting their reputations on the line. It's also clear that the Wall Street analysts like Ramey of D.A. Davidson should be held accountable for their buy ratings and straw man logic, once the dust settles on Ackman's trade.

-- Written by Antoine Gara in New York

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