Herbalife Ltd. rose to the highest price yesterday since before hedge-fund manager Bill Ackman called the nutrition company a pyramid scheme and announced he had taken a short position in the shares.
The stock advanced 10 percent to $44.08 yesterday at the close in New York. The stock closed at $42.50 on Dec. 18, the day before Ackman revealed that he had shorted the shares after researching the company for a year.
The shares jumped after analysts at D.A. Davidson & Co. and Barclays Plc said Herbalife may announce stock repurchases this week when the company reports preliminary earnings for the fourth quarter.
“If we see the pre-release and another large share repurchase, up to and including the $950 million remaining under the authorization, we predict MOASS –- Mother of all Short Squeezes,” Tim Ramey, an analyst at D.A. Davidson in Lake Oswego, Oregon, said in a note. Herbalife earnings may “exceed their own guidance,” said Ramey, who has a buy rating on the shares.
Brian Wang, an analyst at Barclays, said in a Jan. 11 note that he expects Herbalife’s earnings to be “strong,” and the company can buy back 20 percent of its shares, “which would be materially accretive to earnings.”
Ackman, founder of New York hedge fund Pershing Square Capital Management LP, joined Greenlight Capital Re Ltd. Chairman David Einhorn last year in raising questions about Herbalife. On Dec. 20, Ackman appeared at a Sohn Investment Conference in New York and accused Herbalife of using inflated pricing, misleading sales information and a complicated incentive structure to hide a pyramid scheme.
Herbalife executives and consultants hit back on Jan. 10, arguing that all of Herbalife’s payments to distributors are tied to product sales and the company’s accounting practices are legal.
“Management did a good job of debunking some of the claims in the Pershing Square presentation and giving additional clarity where they could,” Wang wrote.
Herbalife had fallen 43 percent from the day before Einhorn questioned its disclosures through Jan. 11. Einhorn has said nothing more publicly about Herbalife since the conference call on May 1. The U.S. Securities and Exchange Commission later looked into the disclosures and closed its inquiry without taking action.
The rise in Herbalife shares yesterday coincided with other investment developments for Ackman. His bet that Hong Kong will amend its 29-year-old peg to the dollar won’t be realized, according to K.C. Chan, the city’s secretary for financial services and the treasury.
The Hong Kong Monetary Authority has injected almost $14 billion since Oct. 19 as the local currency’s move to HK$7.75 obliged it to buy U.S. dollars in the foreign-exchange market. Ackman said Oct. 20 he was keeping his call contracts on the city’s currency and suggested Hong Kong revalue its dollar 30 percent higher versus the greenback to curb inflation.