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Herbalife Update: Has HLF Stock Found Equilibrium?

Herbalife (NYSE:HLF) has had no shortage of volatility in the last year, that’s for sure. But will it keep up?

Maybe, seeing as the bulls and bears are equally strident about their positions. But on the other hand, the give-and-take could mean equilibrium has been reached in Herbalife stock — at least for the time being.

The recent history of Herbalife stock is very dramatic. Here’s the Reader’s Digest version:

  • In May, the stock crashed about 40% fromin a matter of days after hedge fund manager David Einhorn joined the company conference call. Einhorn and his Greenlight Capital fund have made some very successful short-side bets lately, including big bear calls on Green Mountain Coffee Roasters (NASDAQ:GMCR) and Chipotle (NYSE:CMG) among others.
  • The stock stumbled around until December, when another short guru blasted Herbalife as a pyramid scheme. This time it was Bill Ackman of Pershing Square putting the hit on HLF. Herbalife stock was cut in half, from a high over $46 in December to a low of about $25 in a matter of days after the Ackman position on HLF broke.
  • Since the December rout, HLF stock has rebounded handily to stick around $36. That’s a 44% gain for anyone who bought at the bottom a few weeks back. Part of the reason for the rebound is that, just as big-time investors made public their short positions, other big-time investors have gone public with their big buys on the other side. These include Robert Chapman, founder of Chapman Capital, and most recently John Hempton of Bronte Capital.

This much is clear: Back in mid-December, there was a massive weight of short positions in the stock. The short interest topped 26.2 million shares — over 13 days’ worth of trading volume! Unfortunately, I don’t have a premium service that says how much of that short interest has washed out … but we should see a new data dump by Jan. 10.

The more recent short interest figures will be an important item to watch for Herbalife investors to see if the shorts have taken the money and run, or if they are still sharpening their knives.

Where things will go from here could depend on the stock itself instead of the hangover of old sentiment-driven headlines. Herbalife has been going on the offensive since Christmas, touting its strong fundamentals, which include very positive cash flows, growing profits and the hopes of continued stock buybacks.

My two cents: I said I didn’t think the the short-term pop would last, and I’ve been proven wrong. And I still remain very skeptical simply based on the boom-or-bust nature of weight-loss gimmicks and the rampant negativity.

There’s nothing to prevent Herbalife from moving even higher should its earnings and sales stay brisk. But realize that any investment now is predicated not on a snap-back from the oversold levels but on the fact that the stock has reached something of equilibrium.

Only keep riding HLF if you believe in the business, its 3.3% dividend and the prospect of more buybacks boosting shares.

Me, I’m still very skeptical … but I understand why some bulls are optimistic.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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