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Herbalife Will Keep Proving the Bears Wrong

Herbalife (HLF) continues to be a huge headache for Bill Ackman and his Pershing Square hedge fund that famously shorted the stock at the end of 2012. After strong Herbalife earnings, the stock is now up about 85% since the start of the year.

But will the run continue?

It very well might.

Given the still-reasonable P/E and the continued short squeezes on strong data, Herbalife stock could put together a continued rally.

HLF has seen earnings and revenue increase year-over-year for more than 13 consecutive quarters, too, so this is a very strong track record of growth that investors can believe in.

Herbalife earnings just revealed 8.5% growth in Q2 as the diet shake and nutritional supplements company recorded double-digit sales growth. The results topped expectations, and the strong Herbalife earnings prompted the company to raise its full-year guidance, too.

Herbalife has been at the center of a very public controversy for several months now. Pershing Square’s Ackman publicly shorted the stock after claiming it was a pyramid scheme. Herbalife vigorously disputed the claims, then big-time investors Carl Icahn and Daniel Loeb both publicly claimed they were going long Herbalife stock … and in April, two execs backed by Icahn were elected to the HLF board.

So far, it looks like Icahn and Loeb are right and Ackman has a whole lot of crow to eat.

Admittedly, there are risks to Herbalife stock. Nutrition and diet stocks often suffer momentum-driven runs that end when the fad falls out of favor with consumers. Look at a chart of Medifast (MED), Weight Watchers (WTW) or NutriSystem (NTRI) and you’ll see that volatility at work.

If you’re sitting on big profits, it might be prudent to trim some of your HLF holdings after this big run just to be safe should consumer sentiment shift.

Of course, the counterargument to cutting back is GNC Holdings (GNC). GNC stock has outperformed nicely in the past year and has tripled since its 2011 IPO thanks to the fast-growing sports supplement and nutrition market.

Whatever your take on Herbalife earnings and HLF stock in general, just remember that this is a high-profile stock now that these big hedge fund heavyweights are involved. And with short interest that remains more than 40% of the float, it’s safe to say that volatility will continue to be the order of the day.

Herbalife earnings are indeed strong, so claims of this stock being a pyramid scheme are unfair and overblown. But remember that this is rapidly going to become an expectations game, and that just some growth might not be enough to keep Wall Street happy.

When that switch happens is anyone’s guess. But I don’t think it will happen immediately, so have confidence in HLF for a bit longer.

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