Don't Bet on Herbalife -- Enjoy the Show

Positive economic data released on Thursday morning was not enough to keep U.S. stocks in positive territory, as investors reportedly turned their attention back to the Crimean crisis. The benchmark S&P 500 ended the day down 1.2% -- erasing the last of its gains for the year -- while the narrower Dow Jones Industrial Average fell 1.4%. Meanwhile, shares of Herbalife came under more pressure one day after it announced it is the subject of an investigation by the Federal Trade Commission, losing 5.1%, for a cumulative two-day loss of 12.4%. The stock may look cheap at less than 10 times next 12 months' earnings-per-share estimate; but you shouldn't fall prey to the allure of "cheap" -- unless you're knowingly looking for a cheap gamble (and I do mean a pure gamble.)

Where Herbalife may not provide investment value per se, it certainly has been a tremendous source of entertainment value as the battleground between two of the most aggressive and vociferous value investors of their respective generations, Bill Ackman of Pershing Square Capital Management and the legendary Carl Icahn. Once all is said and done, and regardless of the outcome, the "Herbalife affair" will be a classic Wall Street tale about huge, opposite-way financial bets and even larger egos. Ackman put on a $1 billion short position in Herbalife's stock, while Icahn is now the company's largest shareholder, with a 17% stake.

This week, Bill Ackman won a battle when his lobbying of U.S. Senator Ed Markey [sign-up may be required] paid off, as Herbalife announced that the FTC had opened an investigation into the multi-level marketing nutritional supplements company. But don't count Mr. Icahn out - this isn't his first rodeo, and he knows a thing or two about aggressive tactics. Furthermore, Ackman is still underwater on his "short" -- his firm disclosed last month that it was down 49% on the trade. Icahn's long position, on the other hand, is profitable.

Icahn isn't taking this latest salvo lying down, either. Herbalife announced today that it will delay its April annual meeting by five days in order to hold discussions with Icahn. Ackman has said that he will take the fight against the company "until the end of the earth," and he is exceptionally dogged (some might say stubborn.) But this situation could end before it gets that far.

Although I still think it's a low-probability outcome at this stage, I wouldn't be flabbergasted to see Icahn organize a going-private transaction (as an aside, Herbalife's $5.8 billion market capitalization is little more than one-fourth of Carl Icahn's estimated net worth.) Ackman had clearly been pondering adverse scenarios when he reduced his short position via shares and replaced it via options (which can't be called in by a broker).

Herbalife is a very unusual situation; but before you even consider putting a dollar into the shares, ask yourself: What information or resources advantage do I have over Bill Ackman or Carl Icahn? One of them is wrong, but how will you tell who? Investors will be smart to place Herbalife in their "too hard" pile - and enjoy the show instead.