Why Herbalife's Shares Got Crushed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of nutrition products specialist Herbalife (NYS: HLF) weren't looking very healthy today as they fell as much as 26% in intraday trading.

So what: With an earnings-release title that read "Herbalife Ltd. Announces Record First Quarter 2012 and Raises 2012 Earnings Guidance" you wouldn't guess that it'd be such a rough day for Herbalife shareholders. To be sure, first-quarter earnings per share did manage to impress. The $0.88 that the company reported bested the $0.81 that analysts were looking for. Revenue growth of 21% was no joke either. And while the company did indeed raise its 2012 guidance -- to a level that's basically in line with analysts' expectations -- its second-quarter outlook was below what Wall Street was looking for.

Now what: But forget about all of that for a moment, because what really had investors shaking in their boots today was the fact that famed short-seller David Einhorn materialized on the Herbalife conference call and started asking management some very pointed questions. One specific area of inquiry was why the company had stopped breaking out its distributor groups -- something that it'd done prior to the recent annual filing. The market's assumption seems to be that if Einhorn is on the call asking those types of questions then he's either building a short case against the company, or else is already short.

Einhorn has a pretty darn good track record, so there's good reason for investors to be concerned. No investor, however, has a perfect batting average, so investors may want to revisit their assumptions and investment cases before blindly running just because David Einhorn is sniffing around the company.

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