(B)(N) HLF Herbalife Limited

Drama. Our January Post on Herbalife deserves an update and solemn reflection on the nature of the capital markets. Having lost his socks on J.C. Penney, Mr. Ackman of Pershing Square Capital Management LP is now facing the “short-squeeze” of his life as the institutional investors line up against his position and, undoubtedly, have no intention of letting the stock price slip away from them (The Street, October 4, 2013, Bill Ackman Facing the ‘Herba-Squeeze’ of his Life).

Courtesy: Herbalife Limited

More than 50% of the common shares are now owned by just five institutional buyers (Carl C. Icahn (16%), FMR LLC (15%), Morgan Stanley (9%), Vanguard Group Incorporated (5%) and Soros Fund Management LLC (5%)) and the stock price has surged from the doldrums at $40 in January to the current $70 and rising.

Moreover, the company’s sales and profits have been steadily increasing, and it plans to pay dividends of $124 million this year for a current yield of 1.8% which is another burden on the short sellers. Please see Exhibit 1 below.

The price of risk has also increased from $52 in January to the current $60 and the stock is presently trading above the price of risk.

Our estimate of the downside in the stock price due to the demonstrated volatility is minus ($12) per share and we can protect our current position with a stop/loss at $65 or buy the November put at $65 for $4 per share today and partially offset the cost of that with a sold call at $76 for $3.50 per share.

Nash is Happy, Happy

We also note, in passing, that the price of risk resolves a Nash Equilibrium between “risk seeking” and “risk averse” investors and we often describe stock prices below the price of risk as “an excess of supply over demand” (N) and stock prices above the price of risk as “an excess of demand over supply” (B).

Exactly. Now, we just need to do this for everybody, at the same time, and prove that we’ve done it.

The solution (Goetze 2006) partitions any market into a part that behaves like a “risk-free” bond (B) and its complement that behaves like an equity (N).

Exhibit 1: (B)(N) HLF Herbalife Limited – Risk Price Chart

(B)(N) HLF Herbalife Limited – October 2013

Herbalife Limited is a global nutrition company that sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products as well as personal care products.

(Please Click on the Chart to make it larger if required.)

From the Company: Herbalife Limited through its subsidiaries, produces and distributes weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products, and personal care products worldwide. It offers science-based products in four principal categories, including weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition. The weight management product portfolio includes meal replacement, protein shakes, drink mixes, weight loss enhancers, and healthy snacks. The targeted nutrition products comprise dietary and nutritional supplements containing quality herbs, vitamins, minerals, and other natural ingredients. The energy, sports, and fitness products consist of products designed to meet the nutritional needs of athletes, such as Herbalife24 product line, which enables athletes to customize their nutrition program based on personal training and competitive demands throughout the day. The outer nutrition products include skin cleansers, toners, moisturizers, facial masks, shampoos and conditioners, body-wash items, and a selection of fragrances for men and women, as well as anti-aging products. The company also sells literature and promotional materials, including ‘International Business Packs’, start-up kits, sales tools, and educational materials, as well as Internet based tools, such as BizWorks, a customizable retail Website for its distributors. Herbalife Ltd. offers its products through retail stores, sales representatives, sales officers, and independent service providers. The company was formerly known as WH Holdings (Cayman Islands) Ltd. and changed its name to Herbalife Ltd. in December 2004. The company was founded in 1980, has 6,000 employees, and is based in George Town, Cayman Islands.

For more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.