(This is an excerpt from an article I originally published on Seeking Alpha on February 17, 2013. Click here to read the entire piece.)
Friday’s trading in Herbalife (HLF) after Carl Icahn filed SEC documents announcing his 13% stake was a microcosm of how to trade the HLF drama: play the extremes. {snip}
Click for a larger view
Source: FreeStockCharts.com
By the end of the day, HLF settled neatly on top of its 50DMA, a perfect point for shorts to close out positions. Both 50 and 200DMAs are slowly trending downward so shorts and bears still have the overall upper-hand even after a veritable club of big traders have lined up against Bill Ackman. For HLF bulls this means that the buying opportunities come when some story or event causes the bearish pressure to reach downward extremes (my preference). {snip}
Unlike the big sell-off in December, there was no sharp increase in the open interest put/call ratio or a spike in implied volatility to signal something was brewing. Similarly, nothing particularly unusual showed up in the options trading to indicate that an announcement as big as Icahn’s was on its way. {snip}
{snip}
{snip}
HLF guided the following for 2013: “…volume points and net sales growth of 8.5% to 10.5%, and 10% to 12%, respectively…full year EPS to be in the range of $4.40 to $4.55 per share.” Since the earnings growth rate is significantly below 2012’s rate, I suspect expectations are set for HLF to spend the year guiding upward just as it did in the previous quarter. High analyst and investor expectations for 2013 are now aligned against strong short interest: another explosive recipe for a trading extreme. {snip}
I still think that HLF is fundamentally a stock that is converging upon some kind of trading range once the headlines cool down. Ultimately though, this is a stock that can only be played for extremes: boom or bust and/or the short-term extremes in between.
{snip}
Be careful out there!
(This is an excerpt from an article I originally published on Seeking Alpha on February 17, 2013. Click here to read the entire piece.)
Full disclosure: long HLF