Although we had no domestic economic data you can blame nearly all of today's downward move in the broad-based S&P 500 (SNPINDEX:^GSPC) on the combination of Chinese manufacturing data and the biotech sector.
In China, well before our opening bell in the States, we learned that the HSBC Purchasing Managers Index came in with a reading of 48.1. Any reading below 50 implies contraction, and this marked the third consecutive month that China's manufacturing sector had signaled contraction. It was also the lowest PMI reading in eight months which could point to China's recovery hitting another rough patch. Slower-growing economic regions like Western Europe, and the countries like the U.S., are counting on strong growth from China to propel export growth. If China's manufacturing sector continues to decline it's quite possible global growth will be negatively affected.
Also squarely to blame for today's weakness was the biotech sector which was hammered for a second straight session. On Friday, practically the entire sector sank after Gilead Sciences drew the ire of Congress for its pricing of hepatitis-C drug Sovaldi. The thought here being that Congress could try to clamp down on rampant prescription price growth which would be bad news for biopharmaceutical companies.
By days end investors made it very clear that they weren't happy with the overseas or domestic action and pushed the S&P 500 lower by 9.08 points (-0.49%) to close at 1,857.44, its second straight down session.
It may have been a brutal day for most health care companies, but nutritional supplement and anti-aging product develop Nu Skin Enterprises (NYSE:NUS) soared 18.2% after providing an update on an investigation into its marketing practices by China's Administration of Industry and Commerce. According to Nu Skin's press release, it's being fined the equivalent of $540,000 for making product claims that lacked supportive documentation ($16,000) and for select individuals selling items not registered for the direct selling channel ($524,000). Investors had been worried that the penalties from China would come in considerably higher than $540,000. Although this is a big weight lifted off the shoulders of Nu Skin shareholders, there's nothing to stop it from being fined for similar actions in the future. It remains a company that I'm perfectly happy to monitor from the sidelines.
In similar fashion, USANA Health Sciences (NYSE:USNA), which runs a similar tiered marketing platform selling personal care and nutritional products, jumped 9.4% on the Nu Skin announcement. The way investors are looking at this entire sector, including Herbalife (NYSE:HLF), is that if the Chinese government was going to send a message to alleged mutli-level marketing companies it would have levied a considerably larger fine than $540,000. All things considered, this is a big win for USANA and also Herbalife which has faced a mountain of business scrutiny in the United States with hedge fund manager Bill Ackman leading the charge. USANA certainly appears cheap at just over 10 times forward earnings, but like Nu Skin, the possibility of more regulatory action down the road is enough to keep me parked on the sidelines.
Finally, online marketing and reporting solutions provider ReachLocal (NASDAQ:RLOC), which caters its research engines to small and medium sized businesses, jumped 7.7% after announcing the acquisition of the small-to-medium sized enterprise (SME) division of SureFire Search in New Zealand. The two companies have been working together since 2011 in New Zealand and per ReachLocal's press release the addition of SureFire's SME simply made strategic sense in its efforts to expand its international reach and top-line growth potential. It's hard to argue against ReachLocal's logic here, but following three EPS misses in the past four quarters and a growth rate in the low teens, I'm going to need to see more before I can support a forward P/E of nearly 35.
Nu Skin, USANA Health, and ReachLocal all shot higher -- but all three may struggle to keep pace with this top stock in 2014
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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