Real Housewives of Wall Street - The Herbalife Drama Continues...

Jay is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After hours last Tuesday, Herbalife (NYSE: HLF) posted earnings of $1.05 per share, beating the Bloomberg poll consensus of $1.03 EPS. Herbalife also increased its guidance for 2013, going so far as to even budget $10 to $20 million for legal and advisory services responding to investing Giant Bill Ackman, who openly reported in December that he has an enormous short position with a target price of $0!

Naturally, when an investing giant as known and successful as Ackman publically takes such a bold position on a stock, the market reacts. In this case sending Herbalife bouldering off a cliff to the tune of 39% in one day.

In its earnings release, Herbalife did not include any mention of the other Giants in this tale, namely Dan Loeb and Carl Icahn, both of whom have taken a counter position to Ackman (Loeb reducing his position recently). Together, though not likely in concert, these two giants successfully squeezed Ackman's short position, sending Herbalife back up to its current trading range around $40.

And of course the drama spilled over into our televisions in a memorable exchange on CNBC in which Icahn called Ackman "disingenuous." Icahn didn't stop there, stating on Bloomberg TV that he does not "like" or "respect" Ackman. Ackman is no saint in this spat either, stating to CNBC that he told Icahn he "had no interest in being his friend."

So what does all this mean to you and me, foolish investors without billions of dollars to leverage and friends in high places at CNBC to get us on the airwaves? 

It means that when Giants dance, we should get off the dance floor.

It’s extremely tempting to look at Icahn's positions, or Ackman's, or Loeb's, and try to get on the bandwagon.

Oftentimes it works out (who wouldn't have loved to buy Chesapeake Energy (NYSE: CHK) back in May 2012 at $15), but the reality is that pursuing such a strategy is no different than gambling in Vegas. The giants have the advantage on the markets. They have the capital, the media, and the lawyers to actually effect change at a company. 

Would you have been able to take over board seats at Chesapeake Energy like Icahn was able to do? Then go on to remove the company founder from his role as President and eventually get him fired altogether? The fundamentals at Chesapeake Energy are still unchanged since Icahn entered into his positions. His trade is a play on shaking up management and strategy, using the media to further his cause, and leveraging his name and capital to stay two steps ahead of the market. I for one prefer not to invest when I am two steps behind.

The Giants have a plan, and they know what it is. We normal folks don't know the plan. We don't know the entry points and exit points. We cannot present our analysis of management to the board of directors. We are working with yesterday's news. We only hear what they want us to hear.

So by all means enjoy the drama. But please, avoid the stocks. We are all much better served to trade on fundamentals. Know your companies, do your homework, and manage your risk. Don't be a gambler; be an investor.  


jayhjenkins has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, Short Jan 2014 $15 Puts on Chesapeake Energy, and Long Jan 2014 $50 Calls on Herbalife Ltd.. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus