Shares of Herbalife(NYSE: HLF) recently rose as much as 20% on the day that the company wasdeemedby the Federal Trade Commission (FTC) to not bea pyramid scheme. "Not a scheme" is good news, although the FTC ruling does not change the fact that there has been significant chatter over the nature of this company.
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Still, being declared "not a scheme" is way better than the alternative and the ruling should help Herbalife going forward.
In this clip from theMotley Fool Moneyradio show, Chris Hill, RonGross, and Jason Moser explain just what theresults of the investigation were. They also discuss whybillionaire hedge fund managerBill Ackman's Herbalife actions have painted his portrait as an investor in a less-than-shining light.
A full transcript follows the video.
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This podcast was recorded on July15, 2016.
Chris Hill:Shares ofHerbalifeupnearly 20% on Friday as theFederal Trade Commission announcedit has determined that Herbalife is not,in fact, a pyramid scheme. Boy,that seems like a damning with faint praise, Ron,but this does have real money implications.
Ron Gross:Yes. Butit's not all peaches and cream for Herbalife. They do have to pay a $200 million fine,and they do have to agree torestructure their business. They weren't deemed to be completely ...I don't want to use the word "guilt," but, without guilt. They'regoing to have to restructure their business so that just distributors are rewarded forwhat they sell, not how many people they recruit. Now,that very much seems to mewhat Bill Ackman was calling the pyramid scheme part of this. The FTC is saying, "All right, you do have to make that switch there." They're not giving Bill Ackman his due, but they areinsisting on changes.
Stockreacted favorably to that,because being deemed a pyramid scheme would have beendisastrous, paying $200 million is not.
Hill:Yeah. Jason,in terms of public heavyweight fights between big investors,this was maybe the biggest. You haveCarl Icahn on one side,very much a backer of Herbalife,Bill Ackman, hedge fund managerheading upPershing Square,he's having another really bad day.
Jason Moser:Yeah. I hate to go out there and justpick on someonejustforthe sake of picking on them ...I fired off a tweet this morning making fun of Ackman, to a degree.I'mnormallynot going to be very quick to do that,but in this case, I think he totally deserved it,because he really put himself out there. I mean,I think he called Herbalife, like,this was the investment thesis of his life. He has justnever wavered. I think when youlook at the way he has conducted himself here, I thinkthe way he has conducted himselfinValeant Pharmaceuticals...it's not to say he's not a smart guy. He hassome investing prowess. But I thinkone of the keys with investing ishumility. It's being able to look back at yourself and say, "Whoops,you know what, I got something wrong there." Andjumping out there and admitting it, and learning from it. I thinkthis is a lesson in hubris and what not to do as an investor.
Gross:Agreed. He does take looks back,if you read his annual reports, he will take a look back at previous years andpoint out things he did wrong. But, he's coming off what looks like it's going to be two years in a row of very sub-par performance, down around 20% last year, it looks like through the first half of this yeararound the same kind of negative performance, youdon't survive that long in the hedge fund industry,especially in this environment, wherehedge funds are coming under some scrutiny,unless you put up the right numbers.
Chris Hill has no position in any stocks mentioned. Jason Moser has no position in any stocks mentioned. Ron Gross has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.