Buy Herbalife And Get A Piece Of the Good Life

5 replies to "Buy Herbalife And Get A Piece Of the Good Life"

• Brian Okin

  August 7, 2013

  I love your focus on ROIC, and think it is the key to investing also. I love your analysis of aapl and other companies. However, on this one, I’m disappointed in the article.

  You said in your article that you aren’t going into the ponzi scheme argument. But then you take a half hearted side swipe at the ponzi short theme thesis as if it is a real argument against it:

  “For every one complaining that HLF is a scam, there are dozens of reviews praising the company’s products and its corporate culture. This evidence suggests that Herbalife’s value proposition is increasingly attractive to people.”

  That’s not an argument against the “scam” complaints.

  Even worse, your main thesis besides the valuation and the direct numbers is HLF’s “ability to grow its product sales without significant ad spending touches on the core competitive advantage of the company.”

  But that is one of Ackman’s most convincing arguments for FTC intervention. The short thesis is supported by the 1% spent on advertising. You should be asking yourself why and how they are able to get people to buy the product from HLF direct when it is freely available at lower prices online. Why would people be dumping product at lower prices when they can sell it at higher prices within a network of customers?

  I don’t think that Ackman or the short investors would argue about the numbers. The only negative that they say about the numbers is that the markets get saturated, and at some point, the only way to expand is to enter a new market. But in general, this could go on for a long time and be very profitable BECAUSE it is a successful ponzi scheme. It has the low advertising costs BECAUSE it is a successful ponzi scheme.

  You write as if the shorts take the opposite view or don’t appreciate the low advertising % and the high ROIC. The shorts see the inflated ROIC and the deflated advertising % as evidence that it is a ponzi scheme, not that it doesn’t exist.

  Finally, you have the nerve to say, “Unless you believe the SEC (or FTC) will reverse its position and take concrete action against HLF, there is very little downside risk to this stock.”

  Well duh! Of course that’s true! That is the whole argument really! The short case is that this company will eventually run out of markets into which to saturate with its scheme, but it could go on for a long time showing growing ROIC, growing profits, without advertising cost UNLESS someone like the FTC intervenes. So, I find it a bit ridiculous that you are arguing that the stock is a good long term bet, if you eliminate or ignore the biggest risk factor in the investment.

  I believe that this company is a scam. From my perspective, this article is a red herring. It’s obvious that HLF can continue for a long time, unless word spreads about the ponzi scheme to potential “distributors”, or unless the FTC intervenes.

  By the way, do you know anyone who buys HLF products? I don’t.
• David Trainer

  August 7, 2013

  Brian:
  Thank you for your comment.
  You make several good points. I will try to take them in order.

  1. For something to be a scam, the people being scammed must be unhappy with the scam. We mention the reviews to point out that there do not seem to be too many unhappy people.
  It is hard to accuse a company of scamming people if the people you claim are being scammed do not agree.

  2. Perhaps, people pay more for the product directly than online b/c they enjoy being part of the community. Buyers of the product online do not get the same experience as those who participate in the community.

  3. We mention the reviews of the SEC and FTC to point out the fact that: after all this time and attention, you’d think that the SEC, FTC etc would do their darndest to find an issue in order to avoid having any more egg on their face(s) than they’ve already had from prior scandals. Just look at the spike in Insider Trading prosecutions to get a sense of how mush more sensitive regulators are to being sure they are getting the bad guys.

  How much more time (than they’ve already had) would the FTC, SEC etc need to determine whether or not there is any wrong doing?
  They’ve already given the company a clean review a couple times – what is different this time?
  Why would George Soros invest if he thought the regulators might reverse their (now fairly long standing) positions on the company?

  In summary, I think that the shorts mis-understand and do not value the “community” offered by HLF.
• Joe

  August 22, 2013

  David,

  I am interested in the Herbalife discussion, and cannot see it as an honest sound business.

  The “community” offered by HLF is I understand more of a pressure sales environment, promising unachieveable returns for ‘buying in’ to the business opportunity that is Herbalife.

  I see articles such as this one in the FT:

  http://www.ft.com/cms/s/0/be03c578-0048-11e3-9c40-00144feab7de.html#axzz2cW55GU8q

  or this one (no charge to read):

  http://www.theverge.com/2013/3/27/4099100/income-at-home-herbalife-scamworld-biz-opp

  or this one:

  http://www.theverge.com/2013/4/9/4204946/herbalife-stock-trading-halted-amid-allegations-of-insider-trading-at-auditing-firm

  …plus Ackman’s case is pretty compelling:

  http://factsaboutherbalife.com/

  And the complaints are also pretty convincing:

  http://www.businessinsider.com/ftc-complaints-against-herbalife-2013-2#belgium-consumer-everyone-knows-thatherbalife-like-products-and-way-of-business-are-a-pyramid-illegal-scheme-why-dont-you-end-it-1

  …and yet you talk about the “community” offered by HLF.

  I don’t get it. I really don’t. Will you be re-visiting your position any time soon?
• David Trainer

  August 27, 2013

  Joe:

  Please see my comment above that addresses some of the arguments you bring up. The fact is that Herbalife has been around for over 30 years without any wrongdoing as yet being found by the SEC or FTC. For every complaint about Herbalife online, there are plenty of positive comments from distributors and customers, which is the community I’m referring to.
• Kyle Guske II

  July 15, 2016

  Herbalife up 13% today as company reaches a settlement with FTC and avoids any pyramid scheme designation

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