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Herbalife Back in the News

There has been a lot of craziness surrounding supplement giant Herbalife (HLF) as of late, and the stock is once again making headlines today after announcing its preliminary fourth quarter results.

Herbalife will not officially report its fourth quarter results until February 19, but the company had previously issued earnings guidance in the range of $0.97 to $1.01. Today the company surprised Wall Street by increasing its earnings guidance to a range between $1.02 to $1.05. Despite the higher guidance, the stock is trading lower because the company did accelerate its stock buyback program as analysts had been expecting.

While its earnings forecast has the stock in the news today, what has really kept the company in the news has been recent allegations by William Ackman of Pershing Square Capital Management claiming that the company is nothing more than a glorified pyramid scheme.

In case you don't know what a pyramid scheme is… the basic idea is that members earn money by recruiting other members, and not really from selling any goods. When I was in college there was a huge pyramid scheme that swept across campus, and while a lot of people made come quick money, eventually it fell apart leaving the last people who joined losing all their money. That is the problem with pyramid schemes, eventually there will not be enough new members to keep the pyramid going.

The most famous of all pyramid schemes to be pulled of in recent years was that by Bernie Madoff. Madoff lured in new investors with the promise of big returns, but in reality all he was doing was using a percentage of the new money to pay early investors, and putting the rest into his pocket. He used fraudulent reports to show where the money was invested and how the returns were being achieved, and as long as new money came in no one asked any questions. Eventually the new money dried up, distributions stopped being made… and the rest, as they say, is history.

Ackman claims that this is all Herbalife really is, and he is putting his money where his mouth in, shorting around 20 million shares of the stock with a cost of around $1 billion.

On the other side, there is activist investor Daniel Loeb from Third Point Capital LLC. Loeb is known for his ability to sweep into distressed companies and help turn them around, and that is what he is trying to do now with Herbalife. Following Ackman's allegations, Loeb saw an opportunity in Herbalife and jumped in with an 8.2% stake in the company. Loeb has called Ackman's allegation “preposterous”, and believes that the sell off that resulted from it was unwarranted.

Loeb is not the only mutual fund investor to come to Herbalife's defense. Carl Icahn has also announced that he bought a small position in the company.

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.