Nutritional Supplement Companies Need to Work Out

Los Angeles-based Herbalife and Provo, Utah-based Nu Skin Enterprises continue to be lambasted by accusations of fraud. Are these allegations an indication that investors should stay away from nutritional supplement companies, or is there hidden value waiting to be unlocked?

Apr 16, 2014 at 4:04PM

Estimates suggest Americans spend upward of $60 billion per year  on diets or weight-loss plans. Clearly the nutrition market is massive, so investors may be interested in considering some of the leading industry brands. However, large nutrition companies such as Herbalife (NYSE:HLF) and Nu Skin Enterprises (NYSE:NUS) are currently embroiled in controversies over their business models and face sweeping allegations of fraud.

Is this reason enough to declare guilt by association and stay away from other nutrition companies? Or is the market overreacting and opening up a hidden value opportunity? While I believe Herbalife and Nu Skin are volatile investments at best, there is one company in the nutrition space that investors should definitely consider for their portfolios. 

Proceed with caution
Herbalife and Nu Skin have both been at the center of large controversies regarding their business models. Herbalife in particular has become an epic clash of the activist titans, literally pitting billions of dollars on opposite sides of the story.

The most prominent Herbalife critic, Bill Ackman, has shorted $1 billion worth of shares and bellicosely derided the company as a pyramid scheme. The U.S. Department of Justice and the FBI recently opened an investigation into Herbalife,  and disturbing revelations about possibly lawbreaking at Nu Skin are coming to light. 

However, both Herbalife and Nu Skin have benefited from a surge in interest around the world for health and wellness products. According to the Los Angeles Times,  Herbalife "reported $4.8 billion of revenue and $527 million of net income in 2013, making it one of the largest and most profitable companies in the world."

Nu Skin has benefited from growing its China market share, a key region for growth in the global economy. Both companies rely on business models that do not sell products in stores but rather depend upon an extensive network of independent sales people.

With this information in mind, as well as Herbalife's and Nu Skin's jackknifing stock prices, I would be highly cautious of investing in both companies. If the allegations against them are true, both of the stocks are worth next to nothing. But if they are false, the companies will be vindicated. However, that is a significant coin-flip risk. And until more information surfaces, an investment in Herbalife or Nu Skin is dubious at best.

Is Blyth now a strong contender?
A company that's also trying to break into the nutrition sector is Blyth (NYSE:BTH). Blyth is somewhat of a jack-of-all-trades company, owning operations in candles, decorative accessories, seasonal decorations, and household-convenience items in addition to its weight-loss product segment. While this diversification may be appealing, Blyth has unfortunately proven to be a disappointment to investors so far.

Blyth has poured many resources into developing its ViSalus nutrition product line, but unfortunately it seems that the company is continuing to struggle to gain traction . In its most recent quarter, Blyth's revenue plunged 21% from the year-ago level; the ViSalus division suffered from a decreasing number of salespeople in the company's own multi-level marketing setup. With shares down almost 50% since last April, the market seems to be justly punishing a company that has yet to demonstrate consistent growth.

A nutrition company that's built to last
Herbalife, Nu Skin, and Blyth have each had their share of difficulties to wrangle with. But, there is a company in the nutrition sector investors should consider: General Nutritional Corporation (NYSE:GNC). As fellow fool Dan Caplinger notes :

[GNC] reported an 8.2% top-line gain in its latest fiscal year, thanks primarily to an expanding roster of stores around the globe...[GNC has] a growing "direct-selling" presence via its online operations, which continued to expand at a double-digit pace during the period. GNC also continued to benefit from its partnerships with general merchandise retailers such as drugstore giant Rite Aid, which have helped to expand GNC's brand at minimal cost and allowed it to post an adjusted operating margin that hit a five-year high in fiscal 2013.

GNC is an established player in its industry and appears to have a more sustainable dividend than its competitors. With over 6,000 stores in the United States, including 1,100 store-within-a-store in Rite Aid locations, GNC offers a more stable, proven business model in comparison to Herbalife, Nu Skin, and Blyth. Rite Aid is the nation's third largest pharmacy company after CVS and Walgreen's, thus giving GNC helpful exposure to customers.

The company has also successfully branched out into e-commerce,  allaying fears that GNC would not be able to adapt to the rise of online marketing. GNC offers a sustainable dividend in a quickly growing industry and overall is a solid investment in the nutrition sector.

So, when examining the nutrition sector, it appears that Herbalife, Nu Skin, and Blyth all need to "work out" several difficulties in their path. GNC Holdings, meanwhile, looks like a healthy, well-toned company poised to continue returning value to shareholders.

3 stocks poised to be multi-baggers
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have found multi-bagger stocks time and again. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Evan Buck has no position in any stocks mentioned. The Motley Fool has the following options: long January 2016 $57 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