Bill Ackman, head of hedge fund Pershing Square Capital Management, said in his quarterly letter to investors today that he had altered his $1 billion short bet on the nutritional supplements company Herbalife.
He reduced his short — bets that Herbalife’s stock would fall instead of rise — by more than 40% and bought put options, which are contracts that give the buyer a right to buy the stock at a certain price at a certain time. An “out of the money” put option, which is what Ackman bought on Herbalife, can work as a bet that the company’s stock will fall to or past a certain price within some period of time.
Ackman also took a shot at D.A. Davidson analyst Timothy Ramey, saying that he was “perpetually optimistic” and that some investors “believe that he is speaking on behalf of [Herbalife]” because of a detailed note Ramey issued saying that Herbalife might soon borrow $2 billion to buyback stock Ackman also misspelled Ramey’s firm’s name, calling it “D.A. Davison.”
In a note released today, Ramey, the analyst for the Oregon-based D.A. Davidson, reiterated his buy rating on Herbalife, putting a $92 target on the stock and said “clearly there is capitulation” in Ackman’s trades and that they could “well send Herbalife shares much higher.”
DA Davidson has had a “buy” rating and a $92 price target on Herbalife since late July. Ramey said in his note that the puts Ackman bought are likely to “expire worthless” and that shifting his trade “makes no sense” if Ackman “truly still believes” that Herbalife’s stock will go to zero because the put options are time-limited and Ackman could get nothing if Herbalife collapses after the puts expire. “He now needs to be both right on the go-to-zero thesis and right on the timing,” Ramey wrote.
Ackman took his $1 billion short position in Herbalife late last year, describing the company, which sells its nutritional supplements through a network of distributors that sell to customers and recruit more distributors, as a pyramid scheme. Ackman specifically alleged that a large portion of what Herbalife reports as sales to customers are actually sales to aspiring purchasers who are then not able to sell to real customers.
After Ackman announced his short, the stock dived to $26. It has recovered since then, however, and is up more than 200% to $68 per share. The stock is down almost 7% on today’s news.
Other high profile investors, like George Soros and Carl Icahn have gotten in on the other side of the trade, riding the stock’s massive rise this year, making Ackman a persistent but lonely voice among investors who think that Hebralife is destined to fall to zero.
John Chapman, an early critic of Ackman’s Herbalife thesis, told Bloomberg that, “Irrespective of whatever spin Ackman tries to put on this display of legerdemain, the man just screamed the first syllable in ‘Uncle’.”
All of Pershing Square’s funds declined by more than 5% in the third quarter, driven largely by the demise of Ackman’s big bet on J.C. Penney which ended late in August with more than a 50% loss on the investment and continued rise of Herbalife’s stock.