Bull of the Day: Herbalife (HLF)

David Borun
·4-min read

Today’s Bull of the Day and the Bear of the Day share a common theme. They’ve both been disproportionately affected by the outbreak of Covid-19 and their recent reversals of fortune have caused me to completely change my mind about both of them.

I’ve never been a fan of the “multi-level-marketing” (MLM) sales model. Admittedly, that’s as much because of my personal distaste for the practice of hectoring your friends and relatives to buy products as my belief that the bottom-heavy structure encourages exaggerated boom-and-bust revenue cycles.

MLM giant Herbalife (HLF) has been a controversial company for decades. There have been several instances in which the company has been accused of misleading claims, both about the efficacy of its health and beauty products as well as the financial success of its independent sales representatives.

Hedge fund titan Bill Ackman of Pershing Square Capital made a famous $1 billion bet against Herbalife shares in 2012 on the grounds that the company was a “pyramid scheme” and that the shares would ultimately go to zero.  At the time, I agreed with a lot of Ackman’s logic.

Unfortunately, Ackman ran headlong into the long Herbalife trades of another huge whale of an investor – Carl Icahn.

Their years-long public battle resulted in a popular documentary about short-selling called “Betting on Zero” as well as a book by CNBC’s Scott Wapner titled, “When Wolves Bite: Two Billionaires, One Company and an Epic Wall Street Battle.”  (Both are pretty interesting. Check them out if you have the time.)

Ackman ultimately closed his position at a large unspecified loss and Icahn is reported to have booked $1 billion or more in profits.

The Herbalife story has never been boring…

In trading and investing, it’s important to constantly challenge your own beliefs. The more certain you are of any given outcome, the more important it is to seek out opposing opinions to make sure you’re not about to take a hard shot from the blind side. Two good things can happen when you seek out dissenting viewpoints – either you temper your enthusiasm in the presence of new evidence or you get confirmation that the opposition is simply incorrect, bolstering your original hypothesis.

In the case of Herbalife, even though I used to be unconvinced in the staying power of their methods, I have to admit that the company is uniquely suited to survive and thrive in these difficult times. Recent results and improved analyst estimates definitely support this view.

The company started selling weight-loss shakes and supplements in 1980, but has since branched out to exercise snacks and drinks, teas, performance supplements and personal care products. That lineup is sold through a direct sales model in the US and around the world by independent distributors who retain a portion of the profit on their own sales as well as a cut of the sales of other reps they’ve previously recruited.

That model works especially well right now. Representatives can easily contact their families, friends and other contacts via social media channels with no in-person interaction and sell them products that are delivered to their homes by mail.

Herbalife’s product mix uniquely suits the needs and desires of hundreds of millions of people confined mostly to their homes. With consumers intently focused on health and wellness in the face of a deadly pandemic, weight loss and vitamin products have been selling out.

Those same consumers also find themselves unable to access spas and beauty services because those businesses are largely shuttered, but Herbalife’s personal care products allow them to have at least part of those experiences at home.

Not surprisingly, the Zacks Consensus Earnings Estimate for Herbalife in 2020 has been rising rapidly, growing from $2.01/share all the way to $3.40/share in the past 90 days.

Herbalife is currently a Zacks Rank #1 (Strong Buy).

There’s an old cliché that “desperate times call for desperate measures.” In the current situation, it's apporpriate to revise that to, “Unique times call for unique analysis.” The pandemic has thrown many parts of the investing world upside down and a savvy and nimble investor needs to reevaluate what they thought they knew.

Even if you’ve never been attracted to the concept of investing in an MLM company before, it makes sense to take a look at Herbalife. Despite some of its previous shortcomings, you might find that it happens to be the right stock at the right time - right now.

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