What to Do When David Einhorn Strikes

Herbalife shares are rebounding a little after a 22% drop yesterday, when questions from investor David Einhorn during the company’s earnings call sent investors fleeing.  Einhorn is known for spotting accounting problems at companies and backing up his skepticism by taking big short positions. His sharp questioning of Lehman Brothers highlighted issues that ultimately brought about the firm’s bankruptcy.

Herbalife did a reasonably good job of responding to the issues Einhorn raised.  First, it addressed them directly on the earnings call where Einhorn spoke.  Later, the company put out a short statement reiterating its views.  It was a little defensive but conveyed the message that the company regarded the issues as unimportant, and that it had a share buyback plan to shore up its shares. Last, it enlisted support from several analysts who follow the company.  Their comments, which were included in many press reports, expressed confidence in Herbalife’s accounting and its management.

Herbalife isn’t out of the woods, though.  Its statement said it would provide additional detail on its response to Einhorn’s questions, but it has not yet done so.  Company insiders also have been selling a lot of shares in recent weeks, a sign perhaps that management believes the shares have peaked, at least for now, or that unpleasant disclosures might be in the offing.  The latter would be very bad news, both for shareholders and for management’s credibility.

 

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One thought on “What to Do When David Einhorn Strikes

  1. Pingback: Herbalife: An Update | Risk Matters

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