It’s been a wild few days for Herbalife.
After sinking on Monday as Bill Ackman said he was set to deliver a “death blow” to the nutritional supplement company, its shares soared on Tuesday, enjoying the best one-day spike ever as the head of Pershing Square Capital Management disappointed the bears with his emotional, 3½-hour presentation.
Ackman took a $1 billion short position on the stock in 2012 and has spent $50 million campaigning against the company. Herbalife’s business practices are now the subject of investigations by the FBI and the Federal Trade Commission.
On Tuesday, however, the day belonged to Herbalife. And in response to Ackman’s call that “it’s time to shut the company down,” the “Herbalife Truth” Twitter account struck an equally aggressive tone, publicizing the hashtag “#AckmanFail.”
But according to Erin Gibbs, equity chief investment officer at S&P Capital IQ, the 25 percent surge doesn’t reflect market skepticism of Ackman. Rather, she believes there may be another reason for Tuesday’s jump.
“I think the pop we saw yesterday was somewhat because of a short squeeze,” said Gibbs, who has about $11 billion in assets under advisory. “There were about 3 million shares added when the stock was trading at about $60.”
And in fact, Gibbs warns that Ackman’s accusations may not be that far-fetched.
“Investors should listen to Ackman,” Gibbs said. “The recent FTC investigation on Herbalife’s business practices, along with reports in April that FBI and DOJ have opened criminal investigations, indicates Ackman’s comments are not overblown.”
Neither Gibbs nor her firm own any shares of Herbalife and she advises her clients to avoid it as well. She believes regulatory risks outweigh its seemingly attractive valuation.
“I see the concerns about their business model, sustainability of their growth and increased regulatory scrutiny will limit the valuation of the stock,” Gibbs said. “Currently trading at 10.3 times forward earnings brings it to peak valuations since the investigation announcements. I would not expect much more upside from here until those regulatory concerns are resolved.”
Investors who insist on trading Herbalife may find the charts difficult to use, according to Richard Ross, global technical strategist at Auerbach Grayson.
“Admittedly, technical analysis might not be the ideal tool to try to break down Herbalife’s future because it’s so binary or event driven,” said Ross, a “Talking Numbers” contributor. “It’s really all or nothing here. We could wake up one day and the company could be deemed a fraud or we could wake up and these accusations by Bill Ackman and others could be set aside and the stock could soar.”
Nonetheless, Ross says that Herbalife’s support around the $50 level and resistance around $65 is worth keeping an eye on.
“If you’re looking to play this volatility, you would be a buyer above that 200-day moving average,” said Ross. “Use that $65 as your protective stop. And similarly, if we broke down beneath that $65 level, you could be a seller—or even a short seller—of this stock and you want to use, once again, that $65 level as your protective stop on the upside.”
But Ross emphasizes that even if one does buy in, this is not a stock for the long run.
“Ultimately, hedge fund managers like Ackman could be right about this stock being a fraud,” Ross said. “But in the short term, due to that short interest, due to the volatility, they could be very wrong. So take a very small position here and manage that risk.”
To see the full discussion on Herbalife, with Gibbs on the fundamentals and Ross on the technicals, watch the above video.
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