Unstructured Finance

Hedge fund manager Hempton on Herbalife

By Jennifer Ablan
October 17, 2013

John Hempton is bullish on Herbalife but bearish on coal

By Jennifer Ablan and Matthew Goldstein

Hedge fund manager and frequent blogger John Hempton is a little bit like the Jim Chanos of Australia.

Over the years, he’s been a fairly prescient short seller. For instance he was an early skeptic on computer giant Hewlett Packard and travel services company Universal Travel Group, which recently agreed to pay nearly $1 billion to settle a U.S. Securities and Exchange Commission lawsuit alleging that the company defrauded investors by failing to disclose the transfer of $41 million from stock offerings to unknown parties in China.

But unlike Chanos whose Kynikos Associates almost exclusively goes short—makes a bet a company’s share price will plummet because of fraud, unsustainable revenue growth or simply an unrealistic valuation—Hempton’s Bronte Capital also makes a fair bit of money on the long side as well.

In fact, Hempton was a bull on Bank of America back when it wasn’t fashionable in 2011 and many were predicting the big U.S. bank would never get out from under a sea of litigation over its exposures to Countrywide’s mountain of bad mortgages and collapsed securitizations. Today, Hempton likes to say it was a good call (His most profitable bets include Fannie Mae preferreds, Maguire preferred securities, put options on Longtop Financial Technologies and puts on China Agritech).

So it’s always been a little surprising to find Hempton as one of the early hedgies to take the other side of Bill Ackman, who went public late last year with his big $1 billion bet that nutritional supplement maker Herbalife is an unsustainable pyramid scheme that will collapse and see its stock plunge to zero. It’s no secret that things haven’t gone well for Ackman with Herbalife as his Pershing Square Capital Management has rung up about $300 million in papers losses. Billionaire investors Carl Icahn and George Soros have lined up against Ackman on Herbalife and earlier this year, outspoken hedge fund manager Dan Loeb scored a big profit for his Third Point fund by betting against Ackman as well.  (we will link to our story here)

But Hempton’s decision to take the other side of Ackman is curious because Chanos, the man many compare his investing style to, has been in and out of shorting Herbalife.

When we met with him recently at our Times Square office, Hempton told us he initially went into the stock simply because he was betting on a short squeeze and a bump-up after the shares fell sharply when Ackman disclosed his short thesis last December. Hempton told us he got in at around $25-26 a share even before Icahn noisily jumped in and said he was looking forward to seeing Ackman get squeezed out of the stock:

Before Ackman, we would never have been in Herbalife. We looked at this and said: “Oh my God. He just doesn’t know what he is doing from a portfolio management perspective. The first reason we put Herbalife on was that Bill Ackman broke every rule of risk management. He came out there and said, ‘We had this unbelievably strong short case against something, so we are 10%  of our fund shorted and 25% of its float shorted and we did this in the most public way that you could imagine.’ And into Christmas, which is the most illiquid time of the year, this gave it maximum effect, so goes down the stock.

Hempton says while he has lightened his position in Herbalife shares, he still sees the stock going higher, possibly to $105 a share. He says he was surprised to find that there is more there, there to the company than he expected. And that’s why he thinks Ackman’s short thesis will not pan out.

However, don’t think for a moment Hempton has given up on the short side of things, even though 2013 has been a miserable year for short sellers to make money with the S&P500 up about 17 percent. In our conversation, he talked a good deal about energy and he just sees a real rough time for the coal business because mining is costly, dangerous and just plain dirty for the environment.

He told us that a big reason he’s so bearish on coal, especially coal in the U.S., is because it is uneconomical with regards to natural gas. For now, he says most coal in the U.S. is going to be “seaborne” because there are more markets for it overseas than in the US. He says the best market for coal is the less polluting variety which will eventually have a market in China, a big coal user, as it tries to reduce levels of pollution. But even that will not be enough to make coal stocks attractive. He said he is actively shorting stocks of some companies heavily involved in coal production but declined to go public with the names at this time.

So the watchword here is stay tuned.

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