Short Seller Smashes Herbalife Again; Reaction To Ackman Is Different

Herbalife Ltd. (HLF) is a global network marketing company that sells weight management, nutritional supplements, energy, sports and fitness products and personal care products through a network of approximately 2.7 million independent distributors, except in China, where the Company sells its products through retail stores.

So this is obviously a stock and vol note. In fact, this is day two of a cataclysmic decline in stock price and rise in vol for HLF and is all based on comments made by noted short seller Bill Ackman.

I've included the Symbol Summary for HLF as of three days ago, then yesterday, then today one more time, below:


So, the stock has dropped from $42.50 to now $27.49 in four days as the implied has exploded from ~52% to now ~150%. In terms of the content behind Ackman's analysis, I suggest reading the two posts below -- it's pretty nasty but feels very factual. Both of these articles are provided by The Motley Fool.

Bill Ackman's Analysis on Herbalife (Part I)

Bill Ackman's Analysis on Herbalife (Part II)

Let's turn to the one-year Charts Tab below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).


On the stock side we can see the abrupt drop of late, well into a new annual low and in fact, well into a new multi-year low. What I also note is that abrupt drop in early May -- the stock fell from $70.32 on 4-29-2012 to $46.20 just four days later. That drop was keyed off of questions from another noted short seller, David Einhorn. So, in English, this is the second time the stock has catapulted down after well known fund managers have questioned HLF's management. The issues have primarily been the distribution channel and pricing through that channel.

I do note that once the stock fell off of Einhorn's comments (or lack of comments?), the stock did not ever recover to pre-comment levels -- it has hovered at that lower level until... well until the last four days.

I've included the one-year vol chart below.


We can see this time that things are different. The stock decline for both has been ~35%, but the vol has absolutely exploded this time around. After Einhorn's comments the implied was just under 100% at its peak (closing value). Today we see an implied well over 150%.

Finally, let's tun to the Options Tab, below.

We can see the monthly vols are priced to 154.05%, 134.14% and 111.86% for Jan, Feb and May, respectively. While the option market obviously reflects higher vol in the near-term -- that vol is elevated well into May. This time around it feels like the option market reflects not just the risk of a downside move (further), but perhaps the risk of HLF going away as a going concern.

Disclosure: This is trade analysis, not a recommendation.

Images provided by Livevol®