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Herbalife Stock Is a Spectator Sport

Herbalife (NYSE:HLF), the nutrition company that has been the playground of Wall Street bigwigs from Carl Icahn to Bill Ackman to Daniel Loeb, is down for its fifth straight session as an accounting scandal continues to weigh on shares.

On Tuesday, Herbalife stock lost 3% after auditor KPMG resigned the account because of alleged insider trading. KPMG also relinquished its role at shoe company Skechers (NYSE:SKX), but that stock has soared about 8% so far on the week.

The recent accounting scandal just resulted in a downgrade from one of Herbalife’s most bullish supporters in the analyst community. Herbalife stock is now down more than 16% from its January highs, and about 50% in the last 12 months.

HLF has been quite an interesting issue to watch in 2013. But watch is the only thing you should be doing with this company. Herbalife is very volatile and a cloud of uncertainty hangs over this stock, so only daytraders with an iron stomach or a crystal ball should dabble in this company.

In addition to the recent auditor nonsense, Carl Icahn won two seats on the HLF board in early March, and there’s sure to be continued drama in the boardroom and in the press. Furthermore, HLF reports earnings April 29 … and you can be sure after the “pyramid scheme” accusations that the financials will be closely combed over.

This issue is just too hot to handle. Herbalife stock is a sentiment play for daytraders, since fundamentals and valuation are darn near irrelevant. Even watching the charts is dangerous; the KPMG debacle shows how headline risk can upset any trend in the technical analysis.

I put Herbalife in the same camp as imploding death stars like JCPenney (NYSE:JCP), Gamestop (NYSE:GME) and Radioshack (NYSE:RSH) — not because HLF is doomed, but because the cloud of negativity (fairly or unfairly) has resulted in a similar white-knuckle risk. Maybe JCP could bounce back 15% in the next few weeks, but you’re catching a falling knife. And even if it does bounce back 15% … will it stay there?

Actually, a better example may be Apple (NASDAQ:AAPL), which has stopped trading based on its product pipeline or balance sheet and is now simply a sentiment-driven beast that could either get back to $500 in two months or slump to $325.

Most investors should just sit these kinds of trades out.

The fact is, you can’t know what has gone on at Herbalife, and it’s damn near impossible to predict what’ll go on in the future. Sure, there’s always uncertainty on Wall Street … but investors in Herbalife stock are really spinning the roulette wheel.

The fireworks really started in December, when Bill Ackman very publicly came out against the stock. Ackman’s Pershing Square Capital Management came out with a report just before Christmas that labeled the stock a pyramid scheme. Shares went from about $47 to $27 in a few days.

The company was furious, saying Ackman acted while they were all on vacation and couldn’t do damage control. Some pundits speculated that Ackman was just pushing down the position before the end of the year to drive up calendar 2012 performance.

Then other Wall Street heavyweights weighed in on the other side. These included Robert Chapman, founder of Chapman Capital, and most recently John Hempton of Bronte Capital. They said the stock had merit.

By the time Carl Icahn and Bill Ackman argued with each other on CNBC at the end of January — with Icahn calling Ackman a “major loser,” among other great one-liners — the Herbalife show was officially front and center.

So now we have Icahn supporters holding two seats on the board, looming earnings, headline risk … not exactly a stable short-term outlook.

Someone may make a lot of money either shorting HLF here or going long on Herbalife stock because they expect a recovery. But the vast majority of investors have no business placing bets here because of the risk and the laundry list of unknowns.

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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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