David Sterman

Looking for stocks poised to make a major move?

Then find the companies that are loved and hated by investors.

These three hotly-debated stocks have been in the headlines recently as bulls and bears duke it out.

And depending on which camp holds the stronger argument, big profits (or losses) are likely to be bagged in the trading sessions ahead.

Herbalife (NYSE: HLF)

A crowded and dangerous short. Much has been written about hedge fund manager Bill Ackman's high-profile battle against this seller of nutritional supplements. As a quick recap, Ackman thinks Herbalife is a glorified pyramid scheme, with a multi-level sales force that only prospers by signing up yet more sales people further down the rung. Indeed, these types of businesses often implode once a fresh wave of re-sellers can't be convinced to sign on. In effect, the music finally stops, as was the case in the past decade with a number of fruit-based drink businesses that promised stunning health benefits -- and big profits for its sales force -- but ended up washing out.

Is Ackman right? He's likely correct when he says that many Herbalife sellers lost money as they failed to sell enough products to recoup their upfront sign-up costs. Yet he's also ignoring the fact that many Herbalife sellers have made money on product sales. To suggest that this company has never actually sold products seems to greatly over-simplify matters.

Regardless, this is precisely the kind of stock you should never short for some obvious reasons. First, it's what's known as a "crowded short," which means that it's already so heavily-shorted that a short squeeze is often the end result.

Also, Herbalife appears driven to derail shorts by buying back lots of stock (the company claims to have a $1 billion buyback in plan, but with net debt of $180 million, that figure is likely quite over-stated). Still, share buybacks of any size force short sellers to return borrowed shares, which has the same effect as a short squeeze. Indeed, shorts have recently been burned on this stock.

David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com

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