The Blazing Controversy Over Nu Skin

"You sit on a throne of lies."

That's the accusation Buddy the Elf (played by Will Ferrell) leveled at a department store Santa Claus in the movie Elf. And it's essentially what noted short-seller Andrew Left of Citron Research is saying to personal-care products company Nu Skin (NYSE: NUS  ) .

On the other hand, successful investment manager and writer Joel Greenblatt must like the throne Nu Skin sits atop. His fund recently bought nearly 115,000 shares in Nu Skin.

So is Nu Skin the great value Greenblatt thinks it is? Or is it a super villain, as Citron Research paints it? Let's take a look.

Highly valued
There isn't any controversy about Nu Skin's successful run. Earnings grew more than 32% annually during the last five years. The stock shot up over 170% during the same period. But what most likely attracted Joel Greenblatt is Nu Skin's high return on invested capital, or ROIC, and high earnings yield.

ROIC helps investors determine the quality of a company; the higher, the better. Nu Skin's ROIC currently stands at 26.5%. That level more than doubles the ROIC for the S&P 500. The company's five-year average ROIC of 16.7% is also strong.

Earnings yield, which is calculated by dividing earnings before interest and taxes by enterprise value, helps investors determine how attractively a stock is valued. As with ROIC, higher numbers are better. Nu Skin's current earnings yield is nearly 13%, which indicates an attractive valuation.

When you throw in the company's dividend yield of 1.9% with its appealing valuation and strong growth, it's not hard to see why many investors would like the stock.

Highly vilified
But Andrew Left sees a different picture altogether. Left gained notoriety for publicizing alleged problems with companies -- and making money by short-selling the stocks.

His firm, Citron Research, published a report recently alleging that Nu Skin illegally operates a multi-level marketing pyramid scheme in China. Citron also claimed that Nu Skin is in "apparent violation of FDA and/or FTC regulatory law in the U.S." and is "lying about a scientific research relationship with Stanford University for their flagship technology AgeLOC."

The first allegation, if true, represents the most serious potential damage to Nu Skin's growth prospects. The company estimates that 11% of 2012 revenue will come from sales in mainland China, which it sees as a significant source of future growth.

Nu Skin maintains that its Chinese operations are in compliance with regulations. The company cited its eight-year history in doing business in China, stating that the Chinese government regularly reviews its business activities. Nu Skin particularly noted that China has approved multiple new direct-selling licenses within the past year.

Citron's second allegation referenced an FDA import alert about anti-aging creams from March 2012. However, while this particular FDA alert listed dozens of companies subject to surveillance, Nu Skin was not included.

The third allegation prompted Stanford University to ask that Nu Skin remove the name of Dr. Stuart Kim from any marketing materials at Dr. Kim's request. However, Stanford clarified that the university has had a "long-standing research relationship with Nu Skin." As it turned out, Dr. Kim was initially involved in some of that research, but his participation ended.

If we believe Andrew Left, Nu Skin indeed sits on a throne of lies.

Highly vexing
What should investors do?

Citron Research's track record features several successes. Citron points to American Semiconductor (Nasdaq: AMSC  ) as one example. The stock traded at more than $40 per share when Citron published a negative report about the company. It now trades around $4.

On the other hand, Garmin (Nasdaq: GRMN  ) shares hovered around $30 per share when Citron released a gloomy report about the company in late 2009. Garmin now trades near $42.

The jury is still out on recent Citron targets such as Questcor Pharmaceuticals (Nasdaq: QCOR  ) and VIVUS (Nasdaq: VVUS  ) . Citron attacked both companies with reports in July and caused shares to tank. VIVUS still seems to be reeling, but Questcor shares appear to be climbing back somewhat.

At this point, investors probably should wait and see how the story with Nu Skin unfolds. Left might have spotted a bad apple to avoid or short. Perhaps, though, he has helped create an even greater bargain for long-term value investors. In that case, Santa might have come early this year.

If you want to get away from controversial stocks, check out The Motley Fool's reassuring special report: "Secure Your Future with 9 Rock-Solid Dividend Stocks." Get your free report now!

Fool contributor Keith Speights owns no shares in the stocks mentioned above. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 23, 2012, at 12:19 PM, LoyaltoNuSkin wrote:

    Amazing that before comments were made by two writers (who could be financially benefitting from short sales) Nu Skin was named by The Motley Fool as the "Apple of Anti-aging." It is an honest, forthright company that has also created a philanthropic division that has fed over 250,000,000 meals since inception and is still going strong. Congratulations to Nu Skin!

  • Report this Comment On August 23, 2012, at 1:20 PM, GregoryStern wrote:

    There is nothing to be proud of. Nu Skin donates Vita Meals to kids in Malawi that DISTRIBUTORS paid for! Not at all a philanthropic enterprise as an proponent tries to make you believe. ALL of their claims are false and Andrew Left wouldn't be getting away with it if his report wasn't true.

    NUS shouldn't even be listed on Wall Street!

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