Herbalife is going to zero or at least that is what the movie is about called "Betting on Zero." This movie will cause significant problems for the company because it will be in theaters and on demand.

I don't want to add any bullish plays given the monster rally. We are due for some profit taking.


HLF - Herbalife - Company Profile

Herbalife Ltd., a nutrition company, develops and sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products, and personal care products. 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 herbs, vitamins, minerals, and other natural ingredients. The energy, sports, and fitness portfolio consists of products that support a healthy active lifestyle. The outer nutrition products include facial skin, body, and hair care products. The company also provides literature, promotional, and other materials, including start-up kits, sales tools, and educational materials. It offers its products through retail stores, sales representatives, sales officers, and independent service providers. Company description from FinViz.com.

Herbalife has been the target of a $1 billion short position by Bill Ackman for several years now. He has done everything possible to kill interest in the company and drive it out of business. John Fichthorn, co-founder of Dialectic Capital Management and follower of Ackman's crusade, funded a movie called "Betting on Zero" that was previewed at the Tribeca Film Festival back in April. At the time Herbalife was under investigation by government regulators for being a pyramid scheme. Since then, the company settled with the government for a $200 million fine and the promise to change its business practices.

The change in practices is going to kill the company. Instead of being a multilevel as the company has been for the last 35 years, they are now required to pay their associates based on the amount of product sold at retail rather than the sales to members in their downline. This will change the commission structure significantly and associates are going to be fleeing in droves. It removes the incentive to sign up new distributors.

When the film was screened at Tribeca a firm hired by Herbalife bought half the tickets in an effort to reduce the number of people viewing the film.

Last week the HBO show "Last Week Tonight with John Oliver" was a diatribe against multi level marketing companies and the film received some additional publicity after being mentioned on the show.

Billionaire investor Carl Icahn has done everything in his power to drive Ackman out of the Herbalife short. He bought the shares when they were down significantly and has accumulated 35% ownership in the company. He claims he has asked the company for permission to own 50%. He has called for the company to go private. All of his headlines are calculated to lift the stock price. However, since the FTC decision and the mandate to change the business compensation structure, that Ichan headline spam has been a losing proposition. News of the distribution deal for the movie and news that sales in China are slowing, have pushed Herbalife shares to a 9-month low.

I believe Ackman will win this war. Herbalife cannot succeed as a retail company rather than a multilevel company. Earnings are going to collapse and distributors are going to quit.

The company beat earnings on Nov 2nd but they announced the CEO was leaving and that caused the stock to collapse and that decline is continuing. With the captain leaving a sinking ship the outlook is not good.

Earnings Jan 31st.

I am recommending a February put that will have expectation value in the premium when the company reports earnings at the end of January. We will decide at the time if we are going to hold over the report.

Buy Feb $47.50 put, currently $3.05, initial stop loss $56.65.