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Option Trade – HLF - Herbalife
Wednesday June 06, 2012



‘Einhorn Effect' Offers a Great Options Opportunity on HLF – The Silence is Golden!



by Ian Harvey

*OPTION TRADE: Buy the HLF July 2012 47.500 Call (HLF120721C00047500) at or under $2.10, good for the day. Place a protective stop limit at $0.90 and a pre-determined sell at $3.20.

HLF

Description of Herbalife

Herbalife Ltd. (HLF) is a global network marketing company that sells weight management, nutritional supplements, energy, sports and fitness products and personal care products through a network of approximately 2.7 million independent distributors, except in China, where the Company sells its products through retail stores.

The Company is a network marketing company that sells a range of weight management products, nutritional supplements and personal care products. As of December 31, 2011, the Company sold products in 79 countries throughout the world.

Herbalife’s products are grouped in four principal categories: weight management, targeted nutrition, energy, sports and fitness and Outer Nutrition, along with literature and promotional items.

The Company’s generates revenue from its six regions: North America, Mexico, South and Central America; EMEA, which consists of Europe, the Middle East and Africa, Asia Pacific (excluding China), and China.

Reasoning for the Option Tip

Earnings Announcement on April 30, 2012

On April 30, nutritional supplement distributor Herbalife (NYSE:HLF) reported very sound earnings that easily bested Wall Street expectations.

The company said it saw a higher-than-expected first-quarter profit of $108.2 million, or 88 cents per share, compared with $88.7 million, or 71 cents per share, the prior year. Herbalife also said revenue rose 21% to $964.2 million. Analysts were anticipating earnings of 81 cents a share on revenue of $892.9 million.

The only sour note in the announcement was Herbalife’s forecast second-quarter earnings, which it said likely would come in slightly below estimates.

The ‘Einhorn Effect’

The day after this earnings announcement, Herbalife shares were sold off hard after Greenlight Capital hedge-fund manager, David Einhorn, asked some very pointed questions about the company’s financials during the earnings conference call. The stock fell more than 20% that day, and trading actually was halted twice while the NYSE sorted out the heavy order volume.

Einhorn’s specific questions pertained to how Herbalife quantifies distributors, consumers and other clients. Einhorn also asked the company why it stopped disclosing the percentage breakdown among its distributors. The questions brought up concerns about how Herbalife quantifies its business, and that brought out the sellers in droves.

HLF-060612
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The chart here shows the dramatic plunge in the shares due largely to the Einhorn’s questioning of the company. The “Einhorn effect,” as it has come to be known, is indeed powerful, because when Mr. Einhorn asks questions, companies tremble. Other companies that have suffered are -- Martin Marrieta Materials (NYSE:MLM), which plunged more than 10% on May 16, now-defunct Lehman Brothers, St. Joe (NYSE:JOE) and of course, trader favorite Green Mountain Coffee Roasters (NASDAQ:GMCR). All wilted under the focus of Einhorn’s lens, and all sold off on his respective bearish calls.

The ‘Reverse Einhorn Effect’

Now, however, there might be a reverse Einhorn effect in play. In fact, it has come to a point now where what Einhorn doesn’t ask is news. In the case of Herbalife, the stock rose 17% the day Einhorn didn’t list it as one of his least favorite stocks.

I think the more important thing here is that Einhorn’s recent silence on HLF means his initial conference call questions were more clarification-type inquiries than anything else. That means that in retrospect, investors were too quick to dump HLF based on those questions.

In the case of Herbalife, one needs to look at the fundamentals, which despite the noise from the share price, haven’t changed at all since the company reported those robust earnings. Herbalife still has great growth prospects, and the company continues expanding its operations in growth markets such as Latin America and China.

Shares of Herbalife closed at $44.92 yesterday, with a 52 week range of $42.15-$73.00.

The China Development

Since the ‘Einhorn Insurrection’, the multi-level marketing company Herbalife announced, on May 22, 2012, that it has received direct selling licenses in eight regions in China, a development that many analysts think could help spur the company’s growth.

The company now has direct selling licenses in 24 provinces and also operated 68 retail stores in 29 provinces as of March 31. China should continue to be an area of growth. In 2011, revenue in China grew 14.3%. In the first quarter, year/year revenue growth accelerated to 24.6%.

Last year, China only represented 6% of revenue but the potential exists to expand this contribution as its presence grows through additional distributors and sales leaders.

In 1Q12, China sales leaders grew 31% to 9,531 and, at year-end 2011, the company had 171,000 Chinese sales representatives, sales officers, and independent service providers.

Compared to the company's 2.7 million distributors, China is currently a relatively modest market for Herbalife but one that is potentially very significant with a population over 1.3 billion people.

Analysts’ Approach

Auriga maintains a 'Buy' on Herbalife (NYSE: HLF) price target of $68.00.

Canaccord Genuity reiterates a 'Buy' on Herbalife (NYSE: HLF) price target of $76.00.

HLF Rating Summary

• Buys – 4

• Neutrals – 0

• Sells – 0

HLF Price Target Summary

• Highest: $90.00 (DA Davidson)

• Lowest: $68.00 (Jefferies)

• Average: $79.57

Conclusion

In fact, based on the strength of its earnings, strong growth prospects and the “Reverse Einhorn Effect,” then the this option play seems appropriate:-

*OPTION TRADING PLAY: Buy the HLF July 2012 47.500 Call (HLF120721C00047500) at or under $2.10, good for the day. Place a protective stop limit at $0.90 and a pre-determined sell at $3.20.


”Success is simple. Do what's right, the right way, at the right time.”



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"Options traders are not successful because they win.
Options traders win because they are successful."



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