I know its Saturday but I often times do my research for the coming week on the weekend. I always like to have a plan before Monday comes. One stock that I've learned a little about is Herbalife (HLF). I made some money on this stock last week due to the earnings play. I noticed a huge amount of shorts in the stock (30 million and 43% of float). I learned that a hedge fund manager named Bill Ackman shorted an extreme amount of this stock believing that their business model is illegal. I've had some experience is multi-level marketing companies and know the model is not illegal.
The numbers look very good for HLF. Herbalife just reported earnings that beat expectations and guidance was raised as well. Investors love growth and this company is growing. They've grown 27% over the past five years and are expected to grow at a 15% rate over the next five years. The trailing PE is only 14.99 and the forward PE is 11.38. The PEG ratio, which is the PE ratio divided by the five-year growth rate is only .88. I got this number off of yahoo finance. It appears it takes the average PE of the trailing and the forward. The lower the PEG the cheaper the stock. Anything under 1.00 is considered to be a very good value.
Bill Ackman is going to do his best to try and bring the stock price down but due to this large short interest there is extreme risk of the stock moving up very fast and very high. I can't predict the future but I'm going to be watching this stock closely and will try to profit off of it. For next week I already have 4 62.5/60 put credit spreads that I sold at .76 on Friday. That is a 41% gain of the stock can stay above 62.50 by Friday. The stock is currently trading at 64.09 so there is some risk but after seeing their earnings report last week and with all the shorts I think its a very good risk to take.
To give a little information on how the amount of shorts can benefit the longs I want to give my take. I've seen this many times before on stocks that seem way overvalued and have a lot of short interest. Any sudden move up will create a "short squeeze". During a short squeeze people who are short are forced to cover or buy back their shares by their broker. These forced purchases of the stock create a fast move higher in the stock. HLF is very similar but they are not overvalued and have more shorts than I have ever seen in a stock. This is a receipt for a very fast move higher at some point in the future. Now let me be clear about this, Bill Ackman holds a lot of these short shares and he won't be forced to cover. But I'm sure there are plenty of smaller traders who followed Bill's lead who won't have a choice if this stock starts moving up. I don't buy into Bill's theory that HLF's business model is illegal so I'm going to stay long on this stock and I'm expecting it to be very profitable for me over the next few months.
I'm going to be posting some more analysis later so please check me out again soon.
Jonny
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