Shares of Herbalife (HLF) are up over 4% today after beating earnings and guiding higher last night after the close. The controversial nutritional supplement company reported second quarter EPS of $1.34 versus estimates of $1.18. Revenues of $1.22 billion were slightly ahead of the $1.16 billion expected.
All you really need to know about earnings are that they were good enough to demonstrate that the company isn't falling apart. Herbalife fundamentals and shares are only loosely connected. The real driver of HLF is the enormous short squeeze entombing hedge fund manager Bill Ackman.
Speaking at the Sohn Investment Conference last December, Ackman famously announced he was short roughly $1 billion worth of HLF, an amount equal to 20% of the company at the time. In a epic presentation Ackman accused HLF of a Pyramid Scheme and called for regulators to shut it down.
The key part of his thesis came near the end when Ackman vowed to never cover a single share of his position. In other words he intended to ride the stock to zero. Three days later HLF's stock closed just over $26. From there it's been what Carl Icahn has called "the Mother of All Short Squeezes."
Today Ackman has issued a more than 1,700 word press release in which he attempts to poke holes in the company's reporting. Yahoo! Finance Editor-in-Chief Aaron Task says Ackman makes some good points yet misses the real point entirely.
"He's found some things to get concerned about if you're long the stock, but if you're short the stock you've got to be saying 'I'm dead wrong' then get out and do something different because what you're doing now isn't working at all," suggests Task in the attached video.
The Trade: Walk Away From Herbalife
Short squeezes can last longer than you think but it's a lousy wager. Stories like Herbalife make for irresistible theater but for the average investor they can be a disaster. If you listened to people like Carol Roth earlier this year and got long shares of HLF it's time to declare victory and book your gains.
The shorts are the people learning the hardest lesson today. To them the right play is also the hardest move emotionally. They've got to take the hit and walk away. Yes, the fundamentals suggest Herbalife is overvalued and the stock has gotten ahead of itself. It doesn't matter. A bad trade isn't a suicide pact with your broker. You don't have to own it until you're dead.
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