Investors Sweep Bill Ackman Into Dust Bin

NEW YORK ( TheStreet) -- With only a few shopping days before Christmas, Bill Ackman, CEO of Pershing Square Capital, did his best to take as many gifts out of as many Herbalife ( HLF) investor stockings as possible. On Dec. 20, Ackman promised to charity his personal profits from his firm's "enormous" short position in HLF to charity as the capper on an epic slideshow presentation in which he labeled the company a pyramid scheme and predicted it would fail.

The timing of his analysis was perfect: immediately in front of shortened trading days, before the end of the year, with the backdrop of the "fiscal cliff." On Dec. 19, shares began an almost freefall from over $42 a share. Ackman gave his presentation the next day, and two days later, Herbalife shares reached a bottom of $24.24 -- ouch.

Taking some time away from trading the markets, I jumped headfirst into Ackman's short thesis, and was amazed at what I read -- not because Pershing Square Capital made such a clear and convincing argument, but because of the lack of any real argument the stock should experience weakness.

I will admit I started reading with high expectations. After all, Ackman didn't say he anticipated Herbalife would meet headwinds, or could come under revenue and or earnings pressure; no, Ackman loudly pounded on the desk while standing up and declaring a price target of zero, nada, without value, going out of business.

Page after page I continued to read the presentation with two thoughts occupying my mind: The first was "where is the smoking gun?"; and the second was, Ackman must be withholding the clinching information.

From that evidence and my own investigation, I was underwhelmed with the short trade. The chart appeared oversold to me, and I entered into a bullish position by shorting put options and covered calls to capture the highly elevated implied volatility.

I also wrote an article to share my doubts on Herbalife reaching zero any time soon. Will Herbalife End Up a Penny Stock? sums up my original opinion.

It's difficult to imagine the amount of confidence one needs to have to lay one's reputation on the altar of public opinion, but Ackman took that chance. A week has now passed since the presentation and the stock currently trades near the closing price of Dec. 20. What does this mean?

One school of thought is Herbalife could simply have experienced a "dead cat bounce" and is on its way back lower. The other thought is that investors are brushing off Ackman's claims -- maybe he is becoming a fade.

Ackman also recently became a major shareholder in JC Penny ( JCP). Like many, when I read that I was enthusiastic to see positive changes in the company. Unfortunately for JCP investors, the stock closed much lower at the end of 2012 than at the end of 2011.

Considering the size of Ackman's position, it's fair to assume shares will fall further if Ackman liquidates his position anytime soon.

By the same note, it's fair to assume that shares in Herbalife will increase if Ackman has covered his position in whole or in part.


I don't believe the 15% rise in price in the last few days is a dead cat bounce, but I also would not chase this one higher. There is no need to chase, and if you are comfortable with options, look at selling puts and or covered calls as a method to enter. By selling high-volatility options, you allow some wiggle room to get in correctly.

I banked some gains near the open on Wednesday, and will use further price softness to initiate increased bullish positions. I expect continued upside moving into the company's analyst conference coming up in about a week.

At the time of publication, the author was long HLF.

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