A look back at Herbalife, a decade later; Four more lessons on shorting; Federal government revenue versus expenditure; Argentina
1) By coincidence, amidst my series on short selling, today is the 10th anniversary of the launch of perhaps the most famous activist short campaign in history: Pershing Square's Bill Ackman against multilevel marketer Herbalife Nutrition (HLF).
I was in the audience on December 20, 2012 when Bill gave a 334-slide presentation (executive summary here and video here), in which he claimed that the company was a vast, illegal pyramid scheme that was defrauding millions of its distributors worldwide by selling them a nonexistent "business opportunity." He wrote:
The only reason Herbalife can sell ~$1.8bn of nutrition powder per year is because its distributors are buying it with the hope and dream of "achieving financial freedom."
Unfortunately, for the vast majority of Herbalife participants, this dream never becomes a reality, and they leave Herbalife with increased debt, a sense of failure, and damaged relationships.
Worse yet, because Herbalife targets the most vulnerable populations, including low-income members of various ethnic and minority groups, those who fail at the Herbalife business opportunity are those who can least afford to.
It was an extremely compelling presentation and the stock immediately sold off sharply. But then other investors got involved – most notably Carl Icahn, who eventually went on the board and effectively took control of the company.
When regulators failed to shut down Herbalife, as Bill called for (though years later, three different regulators, the FTC, DOJ, and SEC, fined the company a total of $350 million), Icahn engineered one of the great short squeezes of all time. He used the company's cash flow, which remained robust, and borrowed more than $1 billion to buy back massive amounts of stock in 2014, 2017, and 2018. This chart shows the company's operating cash flow and share repurchases for each of the past dozen years:
The result was that the stock, from just before Bill's campaign in December 2012, quickly doubled over the next year, gave back all of these gains, and then doubled again... causing Bill to finally throw in the towel in March 2018, with a cumulative $1 billion loss. (Meanwhile, Icahn sold into the buybacks to exit most of his position, locking in a reported $1 billion profit.)
This chart shows how Herbalife's stock performed during the period in which Bill was involved – a bit more than a double, slightly ahead of the S&P 500:
This chart, tracking the stock since then, shows that Bill covered close to the top – since then, the stock has collapsed, losing around three-quarters of its value, while the S&P 500 has risen roughly 50%:
A decade later, we now know that pretty much everything Bill said about Herbalife was true and the stock is less than half the price at which he first shorted it – yet he still lost $1 billion (not to mention untold brain damage).
It would be hard to find a better case study for why I say that the vast majority of people should never, ever short. It's just too hard because so many things are working against the short seller, as I discussed in my September 23 e-mail, 12 Reasons Not to Short.
By the way, even though we now know that Bill would have made huge gains had he remained short Herbalife, it was a great exit – both from the perspective of reducing brain damage as well as karma.
At the time he covered, his funds had badly trailed the market for several years (thanks, in part, to losses on Herbalife and, even more so, Valeant) – the worst period of underperformance in his career.
But as you can see in this stock chart of his publicly traded investment vehicle, Pershing Square Holdings (PSHZF), he has crushed the market ever since:
And, personally, right at the time he exited Herbalife, he met the woman to whom he is now married and deeply in love...
2) Continuing where I left off in yesterday's e-mail, I'm sharing slides from my presentation on "Lessons From 15 Years of Short Selling"...
Here are four additional lessons:
3) This is an interesting graphic, courtesy of Visual Capitalist:
4) Greetings from the bottom of the earth: Ushuaia, Argentina!
The entire country is celebrating the national team's epic World Cup victory on Sunday – what a game!
After being home a night after my diving trip in Fiji, I was getting stir-crazy... so I hopped a flight down here on Sunday night. (Just kidding!)
I'm here for a long-planned trip to Antarctica with my wife and two of our three daughters (one couldn't take the time off work) and friends of ours (another family of four).
We spent the day in Buenos Aires yesterday and connected last night to Ushuaia, which is on the very southern tip of the continent. We'll spend two days touring the area before getting on our small (50-cabin) ship on Thursday and heading across the Drake Passage to Antarctica, back on Jan. 3 and home the morning of the 4. Here's a website about our trip.
Here's a picture of us on our long layover in Buenos Aires yesterday:
I heard Argentinian beef was good, so upon landing I immediately tried it (at the airport McDonald's)! 🤣
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.