Herbalife Is 'Single Best Idea' in 2014: Analyst

In the wake of Herbalife Ltd.'s(HLF) 139% rally last year to record levels, one analyst says the stock has plenty of room to run higher.

D.A. Davidson analyst Timothy Ramey, a longtime Herbalife bull, calls the stock his “single best idea” for 2014, the second year in a row he is giving it that distinction.

The stock, which we deemed one of the five best stocks of 2013, soared last year despite despite claims by hedge-fund manager Bill Ackman that the company operates an illegal pyramid scheme. Mr. Ramey expects the rally to continue as investors turn their attention away from the short-seller’s allegations and focus on the company’s fundamentals.

“Unleashed from the bear raid, Herbalife should trade on growth prospects,” Mr. Ramey wrote to clients. He, of course, was the analyst who last month took a victory lap by saying he’d like to thank “Mom, Jesus and the short sellers” for Herbalife’s big surge.

Shares kicked off the new year up 1.9% to $80.22.

Mr. Ramey noted the company’s latest audit from PwC showed a clean bill of health, which is a positive long-term catalyst for the stock. And despite the big rally, Herbalife’s valuation still looks compelling. Shares trade at about 15 times next year’s earnings, according to FactSet.

“If "multilevel" were to be fully vindicated as an operating strategy, why wouldn't Herbalife deserve to sell at 25x EPS?” Mr. Ramey asks. “It has impressive margins, huge cash flow, which it has used to benefit shareholders with aggressive share repurchase and dividend increases, and its revenue growth beats anything else we cover.”

To be sure, the scrutiny Herbalife faces isn’t likely to dissipate anytime soon. Last month Mr. Ackman, the billionaire investor, made fresh allegations of operational impropriety and promised to reveal more dirt on Herbalife in 2014. The company has repeatedly denied Mr. Ackman’s allegations.

For now, Mr. Ramey outlines possible catalysts that could push the stock higher this year.

“We continue to think that the situation is ripe for a catalyst – perhaps a leveraged share repurchase, perhaps a leveraged buyout,” he says. “Several noted investors including Carl Icahn and William Stiritz have ‘activist’ positions and are likely to pressure Herbalife to use its zero-debt-net-of-cash balance sheet to leverage returns to shareholders.”

Herbalife has reported quarterly results that have exceeded analysts’ expectations in 19 straight quarters. Mr. Ramey notes the company has kept its dividend constant for the past eight quarters after it upped it by 50% in the first quarter of 2012.