Carl Icahn and William Ackman both have very strong opinions about Herbalife. Each of them has placed a big bet to back their opinions. Ackman disclosed a short position of about $1 billion, and Icahn is long with a combination of shares and options that amount to about 13 percent of the company. One will deliver millions in trading profits to their investors, while the other will lose millions of dollars of their investors’ money.
The only thing we know for sure is that both will continue to earn management fees that would soften any personal losses. Individual investors will not have that benefit.
To show how dangerous this stock is, we can look at recent news. The auditor for Herbalife resigned. Under the intense scrutiny that the hedge fund battle has brought to the stock, Herbalife sold off sharply on the day that news broke. The same auditor also resigned from that role with footwear maker Skechers and that stock rose on the day the news came out.
Wall Street brokers moved to lower their outlook on Herbalife, claiming that they could no longer rely on the audited financials. There were no similar announcements for Skechers.
Despite a dividend yield of more than 3.2 percent, Herbalife is no longer a stock that individual investors should look at as a source of safe income. There is no way to know how a new auditor will look at the company and Ackman has made a compelling case that the Herbalife model could face regulatory scrutiny. Doubts about how regulators will rule could drive the stock price down and with more than 8,000 stocks available to individual investors, there is no need to take a chance on a company that has limited upside and high risks.
Hedge fund managers will win the Herbalife battle because they get paid no matter what happens to the stock price. Individual investors will be caught in the middle and that could be an expensive lesson for them.
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