Herbalife Ltd. rose the most in more than four months, signaling that Carl Icahn’s prediction that rival hedge-fund manager Bill Ackman would become the victim of the “mother of all short squeezes” may be coming true.
The nutrition company’s shares advanced 11 percent to $49.21 at the close in New York for the biggest increase since Jan. 3. The Cayman Islands-based company has risen 49 percent this year, compared with a 17 percent gain for the Standard & Poor’s 500 Index.
Herbalife has fought accusations from Ackman, founder of New York-based Pershing Square Capital Management LP, that it is a pyramid scheme. The company has repeatedly denied the allegations, saying it derives its profits from the sale of unique products. Shareholders have added two directors associated with Icahn, who has come to Herbalife’s defense.
“It’s a discrediting of the short thesis on multilevel marketers,” Tim Ramey, an analyst with D.A. Davidson & Co. in Lake Oswego, Oregon, said today in an interview. “It looks like a lot of short-covering, especially the copycats who got short and don’t have any idea why they are short.”
In a short sale, an investor borrows stock and then sells the shares in anticipation of returning them at a lower price in the future. A short squeeze occurs when other investors begin buying the same stock, pushing its price up and forcing the short seller to buy back the shares, possibly at a loss.
Ackman disclosed in December that he had sold short more than 20 million Herbalife shares, prompting Icahn to take a 16 percent interest in the company, which he began disclosing on Feb. 14. In a Jan. 25 statement, Icahn said the stock may become “the mother of all short squeezes.”
About 23 percent of Herbalife’s outstanding shares were sold short as of today, according to data compiled by Bloomberg and New York-based research firm Data Explorers. Herbalife is the 11th most-shorted company in the Russell 1000 Index, which has an average short interest of 3.1 percent.