Herbalife in Lawmaker's Crosshairs

Now that Herbalife is attracting the scrutiny of a Senate lawmaker, what does it mean for the stock -- and for competitor NutriSystem?

Jan 24, 2014 at 5:42PM

Herbalife (NYSE:HLF), the nutritional-supplements company, already being targeted by a leading hedge fund manager, is now in the crosshairs of a Senate lawmaker. News broke this week that Senator Edward J. Markey, D-Mass., has asked the Securities and Exchange Commission and the Federal Trade Commission to examine the company's business practices. Senator Markey also wrote to Herbalife's chief executive in search of more information about the company.

The company's stock has tanked by more than 10% since the news surfaced.

The legal brief
Herbalife sells vitamins and drink mixes through a network of individual distributors. In 2012 William A. Ackman -- manager of Pershing Square Capital Management -- launched an attack against the company, claiming Herbalife was a pyramid scheme. Herbalife spent 2013 fending off the allegations.

Meanwhile, Herbalife's stock performed well in 2013 as Ackman took heavy losses by going short when other large investors bet against him. So the hedge fund manager began pressing regulators and lawmakers to shut down the company. According to The New York Times, Ackman reportedly met with members of the Senator's staff last fall.

In letters to the regulators dated Wednesday, Senator Markey said, "I have seen reports from Massachusetts residents that suggest Herbalife is a pyramid scheme."

A spokeswoman from the Los Angeles-based company reportedly said in a statement, "We received the letter from Senator Markey this morning and look forward to an opportunity to introduce the company to him and address his concerns at his earliest convenience."

The SEC and FTC declined to comment.

Why it matters
This case could adversely impact Herbalife's shares as the matter unfolds. However, the wheels of justice spin slowly, and it is far too early to predict what the outcome will be. If the agencies find the claims have merit, the SEC will issue what is called a "Wells Notice" notifying the company a formal probe is under way.

Depending on what the inquiry determines, this matter will be something for investors to watch closely. Keep in mind these are only allegations, and the company's stock may be in choppy waters as the case unfolds. This imbroglio could also end up being much ado about nothing -- and Ackman may come out with the short end of the herb stalk, so to speak.

In the meantime, competitors of Herbalife could be in a position to take advantage of this story. One such player is NutriSystem (NASDAQ:NTRI), even though the companies sell different types of products.

NutriSystem in a turnaround mode
NutriSystem is one of the most well-known brands in the weight-loss business. Its direct-marketing model allows the company to operate with little inventory while cost-effectively garnering customers and selling them ready-to-eat meals.

After a period of bumps and bruises, NutriSystem's stock climbed by more than 100% last year before some cooling off to open 2014. The company is strong in many ways. NutriSystem is now debt-free and has a long history of operating with a gross margin of more than 50%.

For the third quarter ending Sept. 30, the company announced revenue was $85.4 million, an increase of 5% from revenue of $81.3 million in the third quarter in the prior year. Adjusted net income was $4.3 million, or $0.15 per share, compared to $2.9 million, or $0.10 per share, in Q3 2012. Net income for the quarter was $356,000 or $0.01 per share.

Finally, the company has a lot of cash on its hands, with cash and short-term investments at more than $41 million. Most important, the company reported it had no borrowings outstanding under its bank facility.

The skinny
Since this is a hot news story, some investors in Herbalife might be inclined to exit quickly, and some speculators may be in the buy/sell mode as they try to make short-term gains. Then there are others who might keep their powder dry until all the cards are on the table.

NutriSystem might be a good alternative for those investors looking to hedge their bets. The company is poised to continue climbing -- provided, however, the management team is successful in making its diet products available to order on the Internet.

Finally, investors in Herbalife should mark their calendars for Feb. 18, when the company will release full-year 2013 results, and a conference call the following day may shed more light on this unfolding legal matter.

Learn from one of the wisest investors of our time
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

 

Fool contributor Kyle Colona has no position in any stocks mentioned. The Motley Fool has the following options: long January 2015 $50 calls on Herbalife. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers