When people "in the know" within a company - including executives, board directors, and shareholders of 10% or more - buy company stock with their own money, it's called insider buying. This kind of activity is often viewed as a bullish sign among investors, because these individuals typically have more intimate knowledge of the company's inner workings and strategic plans than the average investor. By purchasing shares, it suggests these insiders believe the stock price is likely to rise, making the transaction a powerful vote of confidence in the company's future.
But when a company insider buys stock in the aftermath of negative news or heavy selling - as with the post-earnings insider buying on troubled regional lender New York Community Bancorp (NYCB) - it can come across as more of an attempt to boost investor morale than a genuine vote of confidence. That brings us to the recent insider buying on Herbalife (HLF), a long-time short target of the famed hedge fund manager Bill Ackman.
Herbalife Stock Slides After Q4 Earnings Miss
On Feb. 14, the global health and wellness company, which operates primarily through a multi-level marketing (MLM) model, reported a disappointing set of numbers for Q4 2023. EPS fell 47.2% year-over-year to $0.28, badly missing the consensus estimate - and overshadowing a modest beat on revenue, at $1.2 billion.
HLF stock plummeted on the bottom-line miss, with the stock losing more than 31% in a single session as investors reacted to the earnings report. The shares are now down 55.8% over the past 52 weeks, significantly underperforming the broader equities market.
Ackman, who exited his actual short position on HLF in 2018, posted on social media that it was a “very good day for [his] psychological short” on the stock as it hit 14-year lows. The outspoken investor also repeated his criticism of Herbalife's business model as “one of the biggest pyramid schemes.”
CEO Johnson Buys HLF Stock
Shortly after, on Feb. 16, Herbalife Chairman and CEO Michael Johnson purchased 61,725 shares of the company at an average price of $8.0729 per share, for a total value of about $498,300. After this latest transaction, Johnson now owns a stake of 1.1624% in the company.
Notably, this was the first insider buy of HLF stock since May 2023, when the shares were trading above $14 each. And the last time Johnson himself purchased shares of the company was way back in December 2022, during his days as interim CEO. On that occasion, he purchased 19,675 shares for an average price of $12.6885 per share.
In other words, HLF stock pulled back about 36% between the CEO's two stock purchases.
Herbalife is certainly trading at fair valuations, at current levels. The stock is priced at 0.17x forward sales, 4.40x forward adjusted EPS, and 2.32x cash flow. Not only do those metrics represent a discount to the broader consumer staples industry, they're also pretty cheap relative to HLF's own 5-year historical valuations.
On the other hand, growth is expected to be well below average at HLF this fiscal year. Analyst estimates are calling for Herbalife's adjusted EPS to decline 10.6% in 2024, while revenue is expected to expand just 0.54% this fiscal year. By comparison, the median consumer staples company forecast calls for forward EPS growth of 6.24% on revenue growth of 4.27%.
What Do Analysts Expect for Herbalife?
Analyst sentiment toward HLF was largely unchanged after the recent earnings miss, with the consensus rating at a “Moderate Buy” among the 7 analysts covering the stock. Two of those have a “Strong Buy” rating, 4 have a “Hold,” and 1 has a “Moderate Sell” rating.
One of the stock's stalwart fans is B. Riley, which cut its price target on HLF only as low as $16 after earnings - indicating a generous 82% premium from Tuesday's close. In a note, the analyst cited the potential for “sales growth and margin expansion” in the next fiscal year, despite 2024 shaping up to be a “transitional year.”
The mean target price is $14, which denotes an upside potential of nearly 60% from current levels.
