Why Herbalife and Nu Skin Shares Tumbled

 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 Herablife (NYSE: HLF  ) and Nu Skin Enterprises (NYSE: NUS  ) took a hit for the second time this week, falling 19% and 14%, respectively, after activist investor Bill Ackman continued to bash Herbalife and, by extension Nu Skin, which operates under a similar business model, in a presentation on his short position in Herbalife.

So what: Ackman gave investors a 342-slide, three-hour presentation yesterday on why he thinks the company is a pyramid scheme, saying that the company's distributors, or salespeople, make more money recruiting new distributors than selling the product. Ackman added that over Herbalife's 32-year history, 1.9 million salespeople have failed to sell the products, which cost them individually $2,000 in training and other costs. A company spokeswoman responded by calling the presentation a "malicious attack" and said it was based on "outdated, distorted, and inaccurate information."

Now what: Herbalife is planning an analyst day in January to respond to Ackman's claims. Over the past three days, the stock has lost more than a third of its value, so management clearly needs to reassure the market about its model. I didn't see Ackman's presentation, but considering the size and history of Herbalife, his remarks seem suspect. Other observers have pointed out that Ackman has been short the stock for a number of months but chose yesterday to make the presentation as he was believed to have a number of put options expiring today. I wouldn't be surprised to see these stocks bounce back after Herbalife's analyst day response.

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Comments from our Foolish Readers

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  • Report this Comment On December 23, 2012, at 10:03 AM, bossman5000 wrote:

    This might possibly be the worst, most irresponsible investing article I have ever read. It is an insult to call this article an article, really.

    I actually took the time to read the presentation, unlike yourself. It is freely available online. What a joke. You can't even take the time to click through a powerpoint presentation for 45 minutes to write a more informed article for your audience?

    All this article is is an ad hominem attack against Ackman. Oh ok, given his past history, he's suspect. Great research/ opinion there. Ad hominem attacks are the lowest form of journalism./ communication.

    Shame on you and shame on The Motley Fool for publishing this.

  • Report this Comment On December 25, 2012, at 11:03 PM, firebird09 wrote:

    Bet your short the stock too bossman. What a joke. Can't believe people actually listen to a guy that's presenting an attack on a company which he has shorted heavily. Wonder why people are scared to invest these days. Greedy pigs manipulating the market to get richer. You should be ashamed of yourself bud. Why do people listen and panic to these accusations when the guy presenting is padding his account and best interest. What a joke

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