If the FTC Slams Herbalife, These Stocks Could Get Hit Hard

With the FTC investigating Herbalife (NYSE: HLF  ) , the worst-case scenario is now on the table: It's possible that the FTC could, at any moment, shut down the company and charge its executives with operating an illegal scheme. As one of the largest publicly traded multilevel-marketing firms, the shuttering of Herbalife would send immense shock waves through the entire industry.

Even if Herbalife emerges from its FTC probe relatively unscathed, revisions to the rules governing multilevel-marketing firms, or enhanced regulatory scrutiny, could weigh on other multilevel marketers in addition to Herbalife itself. Investors in Nu Skin (NYSE: NUS  ) , Usana (NYSE: USNA  ) , Primerica (NYSE: PRI  ) , and even Avon (NYSE: AVP  ) should be prepared.

Nu Skin and Usana have long traded in tandem with Herbalife
Shares of Nu Skin and Usana have been following Herbalife quite closely over the last year-and-a-half: All three firms bottomed around the time of hedge fund manager Bill Ackman's initial presentation in December 2012, before surging higher over the course of 2013.

Like Herbalife, Usana, and Nu Skin are multilevel marketers with unlimited recruitment downlines and largely commodity products. While Ackman has slammed Herbalife's Formula 1 shake as being an overpriced generic powder, similar criticism largely applies to the products offered by Nu Skin and Usana -- vitamins, anti-aging lotions, and other products offering solutions that are, at best, unverifiable.

Other short-sellers have targeted these companies in the past: Citron Research took Nu Skin to task last year, pointing out extensive issues with the company's business in China. Barry Minkow went after Usana in 2007.

If the FTC were to slam Herbalife, Nu Skin and Usana would emerge as obvious targets.

Primerica, the Herbalife of finance
Primerica isn't as linked to Herbalife as Usana and Nu Skin are, but like those firms, it's a multilevel marketer. Rather than selling personal products, however, Primerica is ostensibly a financial services company.

Primerica has yet to be the target of a well-publicized short campaign, but it has come under heavy criticism in the past, with some calling the company a pyramid scheme (via Business Insider). Last year, Bloomberg shredded the company's business model, noting that while all must pay a $99 fee to try, few ever make it as a Primerica salesperson -- the vast majority fail.

The myth of the Avon lady?
Avon has long been seen as the model multilevel-marketing firm: In an industry potentially fraught with fraud, Avon stands out as a definitive exception. Or does it?

While Avon has some some major safeguards in place, including a three-tier-limited downline, criticism of the company has intensified in recent years, with some alleging that Avon has strayed from its roots. Pink Truth argues that Avon has "shifted" from its retail focus in recent years, and now centers its business on recruiting. Likewise, PyramidSchemeAlert argues that multilevel marketing has "corrupted" Avon, and that the notion of the "Avon Lady" has become a myth.

Ackman's playbook
Last week, on a conference call in which he alleged Herbalife was violating Chinese law, Ackman was asked about his interest in pursuing similar investments. "This has been a fairly overwhelming project," he said, remarking that he "didn't know" if he'd ever do something similar.

But even if Ackman never targets another multilevel marketer, the successful takedown of Herbalife would open the door to other short-sellers. Usana and Nu Skin are easy corollaries, but even Primerica and Avon could be hit hard by me-too investors: Simply doing the groundwork for the FTC could successfully generate alpha. And even if these companies never face short-seller or regulatory scrutiny, they may have to make drastic changes to their business models, weighing on their earnings potential.

Although Ackman has remained focused on Herbalife, his battle with the multilevel marketer seems much bigger, and could ultimately reshape the entire industry.

A better investment than an MLM
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

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 March 18, 2014, at 12:05 PM, success14 wrote:

    As I commented in my post over the weekend regarding this authors last article, I feels his comments are highly opinioniated and without merit. Also by his own admission, the author writes about financial matters but does not disclose having any investment experience. Therefore I assume he has none. So why listn to him.

    Regarding comments about my background, I have been an investor for over 25 years, work in the financial services industry and have many friends, associates and clients who are in network marketing companies including Herbalife.

    I feel that this author like many authors is not telling the facts about Herbalife and merely repeating the same time worn nonsense that has been stated ad nauseum for years and especially in the last year or so by Ackman.

    So therefore I would take anything this author states with a grain of salt, if that.

  • Report this Comment On March 18, 2014, at 12:47 PM, hueyone wrote:

    Some reasons to consider a speculative buy on Nuskin for near term profits:

    1. Nuskin starting to trade independently from HLF. For example, yesterday NUS was up 3.7% while HLF was down 7.9%.

    2. HLF and NUS compensation models are not identical.

    3. When asked about Nuskin, Bill Ackman has no opinion.

    4. Nuskin has been working co-operatively with USA FTC for many years.

    5. FTC investigation of HLF expected to take at least a year; meanwhile Nuskin will continue growing earnings.

    6 FTC investigation of HLF may not result in a significant impact on HLF business model, let alone result in a significant impact on Nuskin business model.

  • Report this Comment On March 18, 2014, at 1:11 PM, hueyone wrote:

    And #7. Valuation: "With Nuskin trading below 7x CY15 EBITDA & still compelling growth opportunities once the dust settles, we maintain Buy & $110 price target" --- Deutsche Bank

  • Report this Comment On March 18, 2014, at 1:48 PM, success14 wrote:

    And #7. Valuation: "With Nuskin trading below 7x CY15 EBITDA & still compelling growth opportunities once the dust settles, we maintain Buy & $110 price target" --- Deutsche Bank

    I agree. I am long NUS and feel that like HLF it is a great stock with great growth supported by a great company. I have many associates who are in Nu Skin. Can't believe how incredible they look!

  • Report this Comment On March 18, 2014, at 4:17 PM, Grampoptemp wrote:

    With the FTC dragged into the fray between HLF and Ackman, largely due to political pressure, which is largely due to Ackman's use of political "friends", anything is possible.

    But probability adds a dimension of reality that I think must be evaluated vastly in favor of a "No Action" ruling for HLF on the FTC's part.

    Considering HLF's ongoing investment in its own shares, a major financial titan on their side, an existing short position of some 25% of outstanding HLF stock, shorts seemingly emboldened by the investigation, and every indication that HLF's revenue and earnings number sill continue to set records, when the probable no fault decision is announced, there will be a major short squeeze on HLF's shares, driving share prices to a multiple of today's prices.

    To support my prediction, I have recently bought back my outstanding covered calls, and am now 100% long in HLF shares. I fully expect to see this stock selling in the triple digits when the decision is finally announced.

  • Report this Comment On April 09, 2014, at 9:09 AM, EvaBrain wrote:

    Herbalife has been a scam from day one and always will be just like Monsanto. Feds will look into them but I don't know about getting them shut down. But I bet their stock will fall significantly when they find out that Herbalife doesn't really make much money. It pays out over 70% of the revenue they generate so Herbalife is cooking their books. You can read more at http://bit.ly/1hglzGp

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2879383, ~/Articles/ArticleHandler.aspx, 12/19/2014 10:54:47 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement