Bill Ackman on Herbalife and his “old” comments on Hewlett Packard

Here is a part of a transcript from an interview made to Bill Ackman in October 5 2011 on Bloomberg TV. Fortunately he did not invest in Hewlett Packard back then:

“We have gotten over the last several months probably at least five or six calls from the largest shareholders of Hewlett-Packard begging us to take a stake in the company and be a proactive shareholder. I think that what we focus on is that we try to find a business that we can predict what it’s going to look like over a very long period of time. I have the fairly quaint notion that the value of anything is the present value of the cash you can take out of the business over its life.”

“The problem is that HP is in a number of businesses where I think it’s very difficult to predict what the business is going to look like five years from now, let alone over the many, many years of a discounted cash flow calculation you need to figure out what the business is worth. The problem you’ve had is that it looks cheap, but the future of the PC industry is a very difficult business to handicap. It’s incredibly competitive. I think the announcement of their intention to spin part of the business off perhaps has damaged the brand and it is a big, complicated mess. One of the things I learned a lot earlier in my career is to do a calculation which I call return on invested brain damage, which is before I make an investment which requires brain damage, or a lot of work and energy, I figure out how much money I can make. The higher the brain damage, the higher the profit has to be to justify it.”

“I was actually at HP yesterday for a meeting unrelated to their core business and it was just depressing walking around. The morale of the employees going from an outstanding company to one where they don’t understand the direction of the business.”

Here is the original video:

I have not informed myself enough about Ackman to form a strong opinion on him. I do know that he did not dislike Hewlett Packard enough to bet against it. But he did though dislike Herbalife to the point to take a huge short position.

I started reading more about Ackman after having recently seen how Herbalife was tanking. He is one of the 91 members of The Giving Pledge. That is the campaign made public by Buffett and Gates to encourage the United States billionaires to make a commitment to give most of their wealth to philanthropic causes.

Ackman revealed, on Wednesday 19th December, that he was short 20 million shares on Herbalife, and put a $0 price target on it. Following the news the shares fell $5.16, or 12.14%, to close at $37.34. That was before he gave the thesis on a pyramid scheme. After his presentation Thursday (Ackman’s Herbalife presentation on pdf here), the stock fell $3.64, or 9.75%, to close at $33.70 a share. On Friday the stock fell 19% more to $27.27. Just 3 days after he announced his short position the stock fell from $42.5 to $27.27. Since the announcement, the company wiped out almost 36% of its market capitalization.

Regarding his Herbalife short position it impressed me when he said “This is the highest conviction I have ever had about any investment I have ever made, full stop.”. He seems quite an interesting person with a lot of conviction in his actions. It also impressed me to see how his recent presentation affected the stock. In the following link you can appreciate the powerful effect of his words on the stock price. As he talked the stock fell, and continued to go down fast today (-19%). I do not know if Herbalife is really a pyramid scheme but I do not like it business model. Its sales have grown surprisingly fast and I am curious to understand how.

It is worth noting that Ackman’s firm has compiled and hosted a website aimed at discrediting Herbalife. By communicating his pyramid theory it seems that he is eager to create a strong catalyst for the shares to drop, and judging by the violent fall, it is having effect.

On the other hand Bill Ackman does not seem to care about market manipulation accusations or litigation coming from Herbalife. Judging by the way he ended his presentation he even looks forward to it: “We welcome the SEC looking at our books”, he said, and concluded by quoting: “Sunlight is the best disinfectant.”.

It will be interesting to see how that Herbalife trade plays out. If it continues falling like this maybe we will be able to buy Herbalife products for Christmas at a deep discount.

Cheers!
jrv

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About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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