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What Kind Of Impact Will 'Betting On Zero' Have On Herbalife?

Despite years of criticism from activists and the Federal Trade Commission, Herbalife Ltd. (NYSE: HLF) has so far stayed afloat with fluctuating share values. But Chris Irons, known on Twitter as Quoth The Raven Research, thinks the company's fortunes are going to turn.

“I do think now is really a time where we're going to see this perfect storm of events occur all at the same time for the company,” Irons said on Benzinga's PreMarket Prep show Thursday morning.

Irons particularly emphasized “Betting On Zero,” a documentary that details the issues surrounding Herbalife, including Bill Ackman's fight against the company. The documentary is set to hit theaters Friday, and will be available on streaming services.

Irons, who's seen the film, thinks the film's release will serve as a major negative catalyst going forward.

“The impact of this movie I think is going to be far greater than anybody is discounting right now on the stock.”

A Movie Review

The documentary has two cuts — one before Herbalife was required by the FTC to pay $200 million to former distributors, and one after.

“The cut that I saw was prior to the FTC decisions,” Irons said. “I imagine the movie has only gotten worse since the FTC came out and completely smacked the company in their complaint, basically bringing it right up to the line of saying the company is a pyramid scheme, but saying they rely on recruiting, which is a hallmark of a pyramid scheme, saying they have been deceptive, which is a hallmark of the pyramid scheme.”

The commission, in fact, called Herbalife a “multi-level marketing scheme,” and the addition of its report positions the film to have a very negative impact.

To Irons, who's followed the Herbalife story closely since 2013, much of the film was not a revelation. But he noted the material that was new, combined with the fact that many outside of Wall Street don't know this story, makes the film scandalous enough to attract widespread negative attention to the company, similar to what Blackfish did to SeaWorld Entertainment Inc (NYSE: SEAS) in 2013.

“The other 30 minutes tells this extraordinarily gripping tale of this activist in Chicago named Julie Contreras, who is fighting on behalf of a small group of Latino immigrants who are out hundreds of thousands of dollars participating in Herbalife,” he said. “As that story starts to play out — and you actually watch these Latino immigrants, and it’s very serious for these people and very real for these people — this is what’s going to resonate with people when this film comes out.”

“Right now it’s easy for people to say, ‘OK, this is a Wall Street movie, whatever. But when this gets public, widespread, national distribution, this is going to resonate with the public on a very deep and very emotional level.”

A Stock Review

The release of the film is partly why Irons believes the stock to be wildly overvalued.

“The company is taking on more leverage right now for whatever they intend to use it for, whether they’re going to buy Carl [Icahn] out of his position or they’re going to just sit on that money as a war chest, it doesn't matter,” he said. “The company was supposed to be doing $7 or $8 in EPS [according to bulls]. Those estimates have fallen dramatically not only because sunlight has been cast on the company and now the truth is starting to run free, but also because the fundamentals of the business, which rely generally around recruitment, are starting to fail and they're starting to taper off.”

In a short report he released yesterday, Irons said he beliefs the stock could fall below $30.

You can listen to the full interview with Irons on PreMarket Prep at 14:55 in the clip below. PreMarket Prep is a daily trading ideas show focused on technical setups and premarket volatility. It airs live every day from 8-9 ET here, and the podcast is available on iTunes, Soundcloud, and Stitcher.

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