Herbalife (HLF) posted first quarter earnings, and was having its conference call today, when David Eihnhorn asked management some questions about its business. Next thing you know, HLF shares are down 20%.
Einhorn is known for shorting Lehman Brothers and more recently Green Mountain Coffee (GMCR). Clients of mine also own both HLF & GMCR shares. This situation is similar to the GMCR one in that both Herbalife and Green Mountain sell products people consume, and both stocks have had dramatic moves higher before Einhorn’s comments (he shorted GMCR stock, this time he was just asking questions).
Sharek’s Take
The questions were in regards to how much product gets sold to customers and how much is sold to independent distributors who buy Herbalife products to then resell. My guess is Einhorn is trying to find out if the goods are really being bought by consumers or just sitting with distributors. In the Green Mountain situation he said K-cups inventory was incorrect in warehouses — that sales were being manipulated.
At this point stocks are falling just because David Einhorn is mentioning them. All he has to do is short a stock, get on a conference call and ask questions, and let the stock come down to rake in a profit. Fairly or not, the stocks come down either way.
HLF opened at $70 today and my 2012 Fair Value was $72 — the stock was at the top of its range. I didn’t think it had much upside anyway, so this could have been a good opportunity to short HLF. When the Green Mountain accusation was publicised GMCR shares were also fairly valued.
I like HLF and it’s a lot higher than the $27 I purchased the stock for (current quote is $55) so we can sit with the shares and see how this pans out. As with GMCR, I’ve previously sold some shares because the stock was already high with limited upside. I’ll continue to hold HLF for now and we will see how this pans out.
Disclosure: Clients of David Sharek owned shares of HLF and GMCR at the time of publication.