It shouldn’t be this easy to make money…
When Herbalife first plunged in January, I raced Speed Retirement Trader readers into the position as fast as I could.
We’d walk away with between 31% and 130% on the position in just days after saying this:
When I saw a situation as laughable as this massive plunge in shares of Herbalife (HLF), I have to question the participants’ sense of reality.
About seven to eight months ago, Bill Ackman shorted shares of Herbalife, according to the Los Angeles Times.
So let’s assume Ackman sold shares short around $45 a share in May 2012.
“Ackman has sold the shares short for about seven to eight months and will present details of his thesis at the Sohn Investment Conference tomorrow in New York, CNBC said.”
The move brought out the herd – the weak hands – that sold the stock on the Ackman news.
Apparently, “sources leaked” to CNBC that Ackman would be calling Herbalife a “pyramid scheme.”
But hold on a second.
If Herbalife were really a pyramid scheme, as Ackman claims, how would it still be in business after three decades?
This isn’t the first time Herbalife has had a scare.
Herbalife plunged when David Einhorn questioned the company’s accounting and distributor incentives back in May 2012.
Einhorn was inadvertently involved with that sell off just because he questioned disclosure.
Even though this was cleared up, Herbalife investors sold the stock on fears that Einhorn was short.
The herd simply got ahead of itself without questioning anything.
The same thing happened again…
No one questioned anything. Investors were spooked again following the “Einhorn incident” and sold everything.
Again, if this were a pyramid scheme it wouldn’t still be around after three decades.
Insiders bought $3 million worth of stock in November 2012.
The company approved a five-year $1 billion stock buyback plan in July.
The company has beat earnings for 12 quarters.
Plus, according to the Wall Street Journal:
On CNBC Wednesday, Chief Executive Michael Johnson called Mr. Ackman’s comment “blatant market manipulation.”
“We’re not a pyramid scheme. That’s a bogus accusation,” said Mr. Johnson, adding he believed Mr. Ackman’s statement appeared to be part of an attempt by a group of short-sellers to push share prices lower before a group of “put” options–or contracts that give the holders the right to sell shares at a predetermined price–expire Friday.
Mr. Ackman said his firm owns no put or other options on Herbalife and said his position wasn’t an attempt to manipulate the market. “We have done our homework here and would never have said what we said unless we believed [it]. We simply want the world to understand the truth about HLF.”
Taking full advantage of the naïve herd mentality, we raced back into the position, buying up puts. In days, we just walked with gains as high as 125%.
We’re about to go long again, though. The bears have gotten far too bearish again on news that the company is the subject of an FTC investigation.
Apparently, the FTC has disclosed a list of about 192 complaints about the company from the last seven years. I don’t expect anything to come of it.
Once this news passes over, we’ll go long before the herd can catch up to us. Stay tuned to Speed Retirement for buy instructions.
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