Whitney Tilson On Herbalife Ltd., 3D Systems Corporation, VICVW Staff
Whitney Tilson comments on hot/controversial companies Herbalife Ltd. (NYSE:HLF) and 3D Systems Corporation (NASDAQ:DDD) as he extends an invitation to the 9th Annual Spring Value Investing Congress.
It was nice to see one of my favorite stocks, magicJack VocalTec Ltd (NASDAQ:CALL), which I wrote up on Feb. 9th (sent first to subscribers of Value Investor Insight – you can subscribe at: www.valueinvestorinsight.com) report strong earnings and jump 20% yesterday (it’s now posted at: www.tilsonfunds.com/CALL-2-14.pdf). It’s now up 53% from the price at which I recommended it.
Herbalife and World Acceptance under investigation
It was also nice to see two of my favorite shorts, Herbalife Ltd. (NYSE:HLF) and World Acceptance Corp. (NASDAQ:WRLD), get clobbered in the past two days on news that regulators (the FTC and CFPB, respectively) are investigating them. I’ve long believed that both companies’ business models are fundamentally rooted in exploiting and victimizing the vast majority of their customers, but they were tough shorts because ripping your customers’ eyeballs out is highly profitable, so the companies kept reporting wonderful growth, margins, share repurchases, etc. – and there seemed to be no end in sight because both companies had been engaging in this behavior for decades (literally) yet regulators hadn’t done anything.
But now that’s changed. The companies won’t be able to fool the FTC and CPFB so I think they’re likely to rein in both companies and end the numerous exploitative things they do, in which case neither effectively has any business left. Thus, my price target for both stocks is zero (which is why I added to my short positions in both after the news broke of the investigations). That said, it will no doubt take regulators some time to act and the stocks could trade anywhere in the meantime.
For more on Herbalife Ltd. (NYSE:HLF), see the two web sites Pershing Square set up, http://factsaboutherbalife.com and www.herbalifepyramidscheme.com. On the former is a presentation Pershing made earlier this week, making what I believe is an airtight case that Herbalife is running a multi-level marketing operation in China. Unlike most of the rest of the world, all multi-level marketing, even if it’s not a pyramid scheme, is illegal in China. China accounted for 9.8% of HLF’s revenues in 2013, but thanks to 69.3% growth, was 25.6% of HLF’s total revenue growth.
In general, I think the media has done a TERRIBLE job of covering the Herbalife Ltd. (NYSE:HLF) story. 99% of the articles focus on the battle between Ackman and Icahn, who’s making or losing how much money, etc. – and almost no reporters have done any actual work/due diligence addressing the only question that matters: is Herbalife a legitimate multi-level marketer (perhaps with a few isolated bad acts/actors at the margin) or is it an illegal pyramid scheme (in effect, a vast criminal enterprise)?
I am only aware of five reporters who are an exception:
A. Christine Richard, who gave Ackman the Herbalife Ltd. (NYSE:HLF) idea (although she was no longer a reporter at the time)
B. Herb Greenberg, who’s written frequently about Herbalife Ltd. (NYSE:HLF) (his latest article is What to Expect from Herbalife Probe) and did a documentary for CNBC called Selling the American Dream: http://www.cnbc.com/id/100359541
C. Michelle Celarier of the NY Post (http://muckrack.com/hedgeygrl)
D. Dan McCrum of the FT, who’s written a 26-part Living the Herbalife series (click here)
E. Jessica Smith Cross of Metro (a paper in Canada), who actually tried to sign up as an Herbalife Ltd. (NYSE:HLF) distributor – and learned exactly how deceptively it’s sold (click here) (if you think her experience is an outlier, please contact me, as I have a bridge for sale…)
For more on World Acceptance Corp. (NASDAQ:WRLD), here’s an excerpt from my Q2 ’13 investor letter: www.tilsonfunds.com/WRLD.pdf
Another possible catalyst for my World Acceptance short is that Wells Fargo & Co (NYSE:WFC), their primary lender, could stop doing business with them. The fact that Wells is currently doing so is in my opinion a disgraceful stain on a great company because Wells is supporting and enabling the exploitation of countless average Americans (in much the same way that Wall St. firms did business with the worst of the subprime mortgage lenders right up until the end of the housing bubble). In general, to fund their exploitative behavior, slimy financial companies usually very much depend on larger, mainstream financial firms, who all too often are willing to look the other way (or, sometimes, actively participate in the exploitation) because of the huge fees to be earned in doing so.
Fortunately, the big banks are currently under tremendous scrutiny regarding who they do business with, and are being forced to respond. For example, JPMorgan Chase has pulled out of lending to payday lenders, pawnshops, etc. due to the regulatory/reputation risks and is getting out of products with “outsized operational risk” like credit insurance and check cashing businesses (see this WSJ article and slide 23 from this slide presentation from JPM’s recent investor day). Thus, it wouldn’t surprise me to see Wells Fargo & Co (NYSE:WFC) cut its ties with World Acceptance Corp. (NASDAQ:WRLD).
3D Systems: Shorts
Speaking of shorts, I’m quoted in the cover story of last weekend’s Barron’s expressing my skepticism about 3D Systems and its peers:
“Investors love organic revenue growth,” says Whitney Tilson, manager of hedge fund Kase Capital and co-founder of the Value Investing Congress. “The problem is that you really have to differentiate between organic revenue growth and profitability.”
Tilson calls 3D Systems Corporation (NYSE:DDD) a “dream short,” and he has been adding to his own short position of late. He’s betting against four other 3-D printing names, as well, which he declined to name. “These stocks are being valued as if this is the next coming of the iPhone and iPad combined,” he says. He describes walking around CES seeing dozens of companies hawking essentially the same thing. “There was booth after booth of companies with very similar products to 3D Systems. And at lower prices.”
He thinks 3D Systems Corporation (NYSE:DDD) would be generously valued at three times revenue, which would put the stock at $15, 80% below its recent close.