Australian hedge fund manager John Hempton, the co-founder of Bronte Capital, has turned out to be a true believer in Herbalife, the controversial multilevel marketing company that has been under investigation by one federal agency or another for several years.
Over the past year, Hempton doubled down on Herbalife, according Bronte’s 13F filings with the Securities and Exchange Commission. As a result, Bronte — a relatively small hedge fund — has become one of Herbalife’s top-ten shareholders.
The problem for Hempton is that Herbalife shares have tumbled — in part due to a Foreign Corrupt Practices Act probe that pummeled its business in China. Herbalife recently disclosed that it is nearing a settlement with the SEC and the Department of Justice over the investigation into its China business. It said it expects to pay $123 million on top of “remedial” changes to avoid a criminal prosecution by the DOJ for three years.
In 2016, Herbalife paid $200 million as part of a settlement with the Federal Trade Commission over allegations of deceptive business practices in the U.S. that put it under the scrutiny of a federal monitor for seven years.
None of this has deterred Hempton, who has been one of the most vociferous defenders of Herbalife ever since hedge fund manager Bill Ackman unveiled his big short at the end of 2012. (Ackman closed out the short in 2018 at a loss.)
At the end of March, Bronte owned 2,314,151 shares, according to its most recent 13F filing. That contrasts with 936,745 shares at the end of 2018 — a 147 percent increase in a little more than a year. During the first quarter alone, Bronte increased its holdings by more than 50 percent. Hempton did not return a request for comment by the time of publication.
While the stock has been volatile, Herbalife is now down about 20 percent year to date, after being down as much as 51 percent at one point this year. Last year it also fell nearly 20 percent, when the broader market rose 31.5 percent, including reinvested dividends.
Herbalife has also become a bigger portion of Bronte’s $611 million U.S. publicly traded equity book. As of the end of March, Herbalife was Bronte’s second-biggest publicly traded U.S. equity long position, after Berkshire Hathaway. At that time Herbalife made up 11 percent of Bronte’s publicly traded U.S. equities.
Hempton’s continued devotion has been costly. In an April letter to investors in the Bronte Amalthea Fund, Hempton noted that “only one large position, Herbalife, performed notably badly.” (It fell 39 percent during the quarter.)
He also said he had “trimmed Herbalife very aggressively above $50 a share and have since bought back some of the position.”
It’s hard to know when Hempton did that trimming — or how big his position once was. Herbalife has not traded above $50 a share in more than a year, and Bronte only started reporting to the SEC on U.S. stocks held at the end of 2018. At least on a quarterly basis, Hempton has been buying Herbalife stock ever since then.
Hempton acknowledged that the coronavirus could hurt the company, whose independent salespeople recruit other salespeople to push the product.
“Herbalife gets much business with face-to-face community meetings. Obviously, the virus negatively affects business development.” he said in the letter. “But Herbalife also sells weight loss food in long-life containers delivered via couriers. That part of the business should be doing very well.”
Such big containers were recently discovered to be transporting marijuana abroad. In another negative development for the company, authorities in the Philippines recently seized nearly $261,000 worth of marijuana that was shipped from California in Herbalife meal replacement shake tins, according to an April 6 report in a local newspaper, the Manila Bulletin. The Philippine Drug Enforcement Agency is investigating the matter.
“Our research suggests Herbalife sales will not be down much,” noted Hempton in his letter. “We have added a little to the position and will probably add more.”
Herbalife recently reported a quarterly decline in net income of more than 50 percent. But its China sales had bounced back, up almost 30 percent over the first quarter of 2019, and volume points — a proxy for sales — were up 5.6 percent.
As for Bronte, even with the Herbalife losses, it has had a good year. Largely because of its short positions, Bronte gained 4.3 percent in January, 4.2 percent in February and 11 percent in March, according to the letter.
