The Ultimate Bull vs. Bear Fight: Herbalife

 | Jan 10, 2013 | 2:00 PM EST
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Investors can't often say that the most can be had just by watching a stock from the sidelines -- regardless of whether the price surges or sinks. In the case of one particular stock, it's a given that the stock will climb or fall; the shares will not sit still. That stock is Herbalife (HLF), a seller of nutritional supplements through its own network marketing channels.

Herbalife first came to the forefront several months ago when hedge-fund manager David Einhorn questioned the company's marketing practices on a conference call. Shares dropped. Several weeks ago, activist investor William Ackman of Pershing Square Capital Management, in his trademark style, presented a 330-page slide show in which he essentially called Herbalife a "pyramid scheme." Ackman revealed that he was short around 20 million shares, close to a billion-dollar trade. In response, shares fell by about a third to around $27 from nearly $40 in a manner of days.

Enter Daniel Loeb, manager of Third Point Capital, also a highly regarded and respected heavy hitter. Loeb revealed that Third Point is long 8.9 million shares of Herbalife, representing an 8.2% stake in the company. Loeb said, "All multi-level marketers by definition operate under a so-called 'pyramid' structure and have some internal consumption, facts which do not render them patently illegal." Loeb also took a slight jab at Ackman: Third Point started building its stake in Herbalife "mostly during the panicked selling that followed the short seller's dramatic claims."

There you have it: the ultimate bear vs. bull battle. I don't recall ever seeing such a public conflict over a stock. And the money involved is not chump change: hundreds of millions, if not billions, of dollars are up for grabs. Right now, Loeb has the wind at his back. Herbalife shares are trading back above $41 a share, up more than 50% since the low price of $24 on Dec. 24, 2012. And shares look to be climbing still.

It's likely that the ultimate winner won't be declared for months. Loeb believes that Herbalife shares are worth north of $60. The stock, while up massively over the past two weeks, is still well off its 52-week high of $73. And it's not impossible that shares will continue to climb, Loeb takes his profits, and Herbalife ultimately falls victim to Ackman's claims. As it stands, Herbalife is a $4.5 billion company that has shown impressive growth results: Free cash flow has nearly doubled over the past three years.

Maybe Real Money Pro options guru, Tim Collins, has an option-pair trade that considers both the bearish and bullish stances. Either way, this is going to be a highly visible stock for next several months. Ackman and Loeb have had highly publicized successful trades and not so successful bets. Loeb is known for his loose pen and unafraid to use colorful adjectives. Ackman is an intense and patient investor. He has pledged any gains from Herbalife to charity.

If investors want a lesson in being independent-minded, now is your chance to learn from two of the best. Over the coming weeks and months, both they will find out why they are right or wrong about Herbalife. Ackman said it best; his goal is "to shine a spotlight on the company so that the world better understands the facts about Herbalife. ... The outcome of this investment is not about Pershing Square or anyone else who is long or short the stock. To the extent another investor, long or short, brings additional sunlight to the situation, we welcome them."

It just so happens, hundreds of millions of dollars are riding on the outcome.

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