Regardless of what happens with the Federal Trade Commission investigation, there's almost no plausible way Bill Ackman is correct that the stock is worth zero. For the sake of argument, I'll concede zero means anything less than a dollar a share.
The problem for short-sellers is there is isn't a known path for the stock to reach $1.
Ackman's first problem is his entire bear thesis: a 34-year-old company operating in 91 countries is an illegal enterprise. The short thesis also assumes Herbalife can't strategically adjust if needed to comply with any given jurisdiction. That's a fatally flawed assumption in a global marketplace.
Think about that for a moment: Herbalife operates in 91 countries. Modification of the business model in a few jurisdictions doesn't necessarily result in the collapse of the company.
However, that's exactly what short sellers are arguing, that Herbalife is a binary play and if the FTC drops a hammer on the company it will simply disappear. Nothing could be further from the truth.
It reminds me of another international company that many wrongly warned could be wiped out because of one market.
One of the few advantages of getting older is the experience you gain and the clarity of knowing what to expect. The FTC is Herbalife's Deepwater Horizon oil spill event. If you recall, in the spring of 2010, an oil rig built and operated by BP (BP), Halliburton (HAL) and Transocean (RIG) spilled millions of gallons of oil into the Gulf of Mexico. BP shares were cut in half and its fixed income notes (bonds) fell over 15% from par.
It didn't take long after the spill began for pundits on the web and TV to warn BP's financial exposure could force the company to declare bankruptcy. By the look of the stock and bond price charts, they appeared to have credibility. I performed my own research (it isn't that hard if you're willing to put the time in) and found BP corporate structure was designed to isolate geographic and jurisdictional regions.
North America comprised 30% of the entire world-wide company. Along with other information, I could infer the maximum exposure was probably less than 50% of the company and the senior notes trading at a discount were significantly oversold relative to the risk exposure.
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.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.