Last week Herbalife Limited (HLF, Financial) garnered media attention owing to a public spat about market manipulation of the stock on CNBC by activist investor Bill Ackman (Trades, Portfolio). He had come on the show to defend himself against the charges of trying to downplay the stock and negatively impact its movement. There are allegations against him of trying to manipulate Herballife stock in order to bring the stock price down. The allegation also states that the market may have been manipulated or influenced by Ackman to impact the stock price of Herbalife in a negative way. He has been accused of directly and indirectly making false statements to the regulators and urging them to conduct a probe on Herbalife and in turn drive down the stock price.
The Bill Ackman effect
The billionaire hedge fund investor Bill Ackman (Trades, Portfolio) has been carrying out an anti Herbalife campaign since the last two years. Through his New York hedge fund Pershing Square Capital Management, he launched a public attack through a presentation on Herbalife two years ago. In his presentation he alleged that Herbalife was operating like a pyramid scheme which could collapse and urging the authorities to probe into the matter. After Ackman’s announcement Herbalife stock plummeted in four straight trading sessions falling 43% and closing at $26.06 in December 2012. This gave a scope to large hedge fund investors like Ackman and Carl Icahn (Trades, Portfolio) to buy the stock at a much cheaper price. But this downslide led to the retail investors losing out on their investments within a short period. Post this steep drop, the shares rose consistently in the following year hitting a new high of $81.81 roughly a year back on Jan 10, 2014, only to slump again to $29.70 within the next ten days.
In retaliation to Ackman’s accusations, Herbalife has lodged a counter attack on Ackman accusing him of intentional misdemeanour against the company by placing a $1 billion bet. The Company spokesperson Alan Hoffman alleged that Ackman has pumped in more than $75 million over two years in his orchestrated campaign against Herbalife. The Company feels that this is a strategy by Ackman to bring down the stock price and win the bet placed against the company. Herbalife has been urging authorities to investigate the movements and intentions of Pershing Square.
The authorities have taken a note of this issue and decided to investigate whether the market or the Herbalife stock was manipulated. On March 13, the FBI announced that it would probe the matter and this came as a relief to Herbalife management as well as investors who are expecting a fair investigation.
Stock performance
Despite the media glare and the negative undertone of the entire issue, the stock rallied on Friday. The stock price rose by 8.2%, or $2.71 and closed at $35.96 by the end of Friday’s trading session. Analysts believe that the upswing was in the anticipation of a fair investigation in to the matter by the government authorities which may prove to be undesirable for Ackman on financial as well as reputation front. In its last quarter results, Herbalife had beaten the street consensus as well as its own projections for the given period.
During the last week of February 2015, Herbalife reported 10% higher earnings for the fourth quarter of 2014 as compared to the corresponding quarter in 2013. The Company reported earnings of $121 million in the fourth quarter or $1.41 per share. The consensus earning estimation stood at $1.16 per share, lower than $1.30 to $1.40 projected for this quarter by Herbalife. With this announcement the company returned back to its reputation of beating the expectations after a gap of two dull quarters. The guidance for the entire fiscal of 2015 appears to be dull owing to the strengthening dollar which is impacting the movement of the products out of the country.
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