Aside from being a notable short, Ackman insists that the nutrition and weight-loss company is a "pyramid scheme." Ackman has had a long battle with Herbalife.
On Tuesday, the activist investor launched a few more attacks. According to Bloomberg, Ackman, along with his firm Pershing Square Capital Management LP, hired OTG Research to evaluate Herbalife's China operations.
Ackman says the investigation discovered that illegal payments were made to people by Herbalife, based on the number of new recruits they're able to bring to the company. If true, this would breach direct-selling laws in China.
During Tuesday's two-hour presentation, Ackman said of Herbalife, "They defraud millions of people." Ackman then continued, "Their portrayal of their China business in their SEC filings is materially false and misleading."
Herbalife is not taking these accusations lightly. In response to Ackman, the company said:
"Herbalife remains confident in its business in China, which is built on customers enjoying and benefiting from our nutrition products each and every day."
"We will continue to invest in this important market and collaborate with the Chinese government to deliver high-quality nutrition to the Chinese consumer through lawful direct-selling practices."
And regarding Ackman's presentation, Herbalife insists that the only thing it accomplished was to reveal Ackman's "continued failure to fundamentally understand Herbalife's business model."
So what's an investor to do in this situation?
We have no way of knowing whether Ackman's thesis is true. The truth may come to light somewhere down the road. But as it stands, it's his word against Herbalife's.
It also can't be ignored that Ackman wants to be right on his short position. After all, he has a price target on the stock of $0 and is bearish roughly 20 million shares.
The other thing is, and perhaps more importantly, the Securities & Exchange Commission has offered no official response supporting any wrongdoing by Herbalife. And the way I see it; the SEC's involvement is the only thing that should matter in this situation.
Ackman is in no position to be objective. Accordingly, investors shouldn't assume that his "investigation" is anything other than a personal vendetta.
Here's what we do know: According to recent SEC filings, Herbalife is growing revenue at a rate of 18% year over year. In the fourth quarter (reported Feb. 19) the company posted sales of $1.3 billion, which represented year-over-year growth of 20%. Even more impressive was the 28% surge in earnings per share.
Now, if this is indeed a pyramid scheme as Ackman claims, Herbalife still deserves credit for being a profitable one. With a 15% increase in the number of new members, it seems the company is doing an above-average job presenting its capabilities. Not to mention, customers are responding (With revenue climbing close to 20% year over year, customers are responding to Herbalife's products by opening their wallets). For that matter, so are investors. After the Herbalife stock bottomed last summer at $34.72, investors affirmed their faith in the company, sending the shares up 90% in the trailing 12 months.
I don't expect Ackman to give up this fight anytime soon. But Herbalife, which has been around for 34 years, has no plans of being shaken down. With new initiatives to recapitalize the company and increase strong cash flow, Herbalife management is doing everything it can to regain investor trust. With shares trading at $69 after falling to the mid-$30s last year, Ackman might want to cover his short and get a life.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.