Bill Ackman announced his short position against Herbalife in December of 2012.  With much media fanfare, he gave a 300+ slide presentation explaining the validity of his thesis. On Bloomberg, he confidently declared, "This is the highest conviction I’ve ever had about any investment I’ve ever made."  To the casual onlooker, it appeared that all hope was lost for Herbalife.  But for those of us that benefited from a little more context, we knew better.  Shane Dineen, Ackman’s top analyst responsible for the Herbalife research, surprisingly no longer works for him.  

In 2016, the FTC did the bidding of Ackman and sued/settled with Herbalife in July of 2016.  As part of the settlement, Herbalife had to agree to modify its business.  Most notably, Herbalife was required to eliminate monthly volume requirements and generate at least 80% of its revenue from retail sales.  

‍FACT: If Herbalife was truly a pyramid scheme, it most definitely would have collapsed.  Pyramid schemes are driven largely by products that lack real value.  They’re incapable of generating meaningful retail sales; thus, they rely almost exclusively on recruitment because only the distributors would buy.  In the FTC’s loss againt Neora, the court found that Neora was NOT a pyramid largely because it was able to prove that 70% of its revenue was from customers.  

I’ll be candid: I was suspicious whether Herbalife could hit the benchmarks.  It’s hard enough for companies to generate 50+% in retail.  But 80%?  It was a tall order.  Herbalife is not self-reporting these numbers.  There was (might still be) a court-appointed monitor chosen by the FTC to ensure Herbalife was living up to its end of the bargain.  Fast forward several years later, Herbalife lives on.  

The stock price has suffered, it’s down 50% since the settlement.  The stock price is not the right metric to look at, though.  The right metric, in my opinion, is its Volume Points.  Volume Point is the key metric Herbalife uses to measure product flow. The chart says it all.  Look at it closely.  The bars represent Volume Points by quarters.  The red bar is when Herbalife settled with the FTC.

The data is crystal clear. The graph above indicates that Herbalife's volume points have not only stabilized post-settlement but have shown considerable growth. If Herbalife was truly a pyramid scheme, there’s zero chance they would have been able to meet the 80% benchmark.  Yet, contrary to opinions of critics, product continued to flow.  

Early on during the attacks, Herbalife released survey results that suggested that 70+% of its revenue came from customers.  The FTC and its allies were dismissive of this data and pressed forward.  The data above, in my view, is a complete vindication of Herbalife’s position.  

I have never seen a company as besieged by negative media as was done to Herbalife.  Hundreds, possibly thousands of articles poured into SeekingAlpha, some from anonymous trolls, most from “professionals” in both finance and economics.  Not surprisingly, the barrage of content ended the moment Bill Ackman backed off his short position. Was he funding this energy?  Maybe. I always thought it looked suspicious that this audience of voracious writers just disappeared when Ackman backed off.  

Conclusion: The lack of energy about Herbalife’s continued growth is mind-blowing to me.  Years were invested in tearing this company down.  Shareholders were whip-sawed.  Books were written.  Hundreds of millions of dollars invested in investigating, litigating, publicizing the downfall of this company.  And despite all of it, the product volume has continued to climb.

Is there another example of a company being forced by the government to “fundamentally change its business practices” and that same company growing?  At some point, one would think there would be a follow-up by the media to ask how in the world so many people, including the FTC, got it so wrong.  Ackman ultimately lost $1,000,000,000 on this trade.  

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