Celebrity Investors and the Voting Machine
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are two types of celebrity investors: The quiet ones and the loud ones. While quiet big-name investors may make a noise from time to time, it’s the loud ones that most often have drastic effects on the stock market.
The Voting Machine
Warren Buffett, perhaps the world’s most recognized investor, has tremendous influence on the stocks that he buys. Not only does he invest billions of dollars at a time in companies through Berkshire Hathaway (NYSE: BRK-A), many investors are encouraged to buy a stock based on his actions alone. Stock prices generally move up on the news that Buffett is buying. Yet, the impact is often short-term and temporary. As Buffett said, “In the short run, the market is a voting machine. In the long run, it’s a weighing machine.”
For example, when Buffett announced Berkshire was buying shares of Bank of America (NYSE: BAC) in late August of 2011, the stock price quickly jumped nearly 30% before coming back down to prices well below where Buffett bought in. Patient investors, who ignored the market’s hysteria and started researching Bank of America when all the hype started, could have gotten a better price with all the benefits of another profitable Buffett pick.
Bill Ackman, of Pershing Capital, is the latest celebrity investor in the news. His lengthy presentation on Herbalife (NYSE: HLF) sent shares plummeting nearly 40% the week leading up to Christmas - not a happy holiday for shareowners. Shares have since recovered about half of the loss, but investors remain wary.
The main attack against Herbalife in Ackman’s presentation is that the company is essentially a pyramid scheme, generating revenue from recruiting new sales people and not from selling products. This is an unsustainable business, and will eventually lead to Herbalife’s stock going to $0 per share.
While the attack was directed at Herbalife, it also had tremendous effects on other multi-level marketing (MLM) companies like NuSkin Enterprises (NYSE: NUS). While we wait for Herbalife to counter Ackman’s attacks in a conference call next week, NuSkin has faced similar attacks in the past and disproved accusations of being a pyramid scheme.
NuSkin is heavily invested in the Chinese market, where MLM laws are very strict, earning 25% of revenues from the country. Citron Research recently accused the company of violating the MLM laws in China, but NuSkin was quick to counter the allegation. NuSkin pointed to all the necessary licenses and paperwork filed with the proper Chinese authorities as well as its salary and benefits package for salespersons.
While Citron’s allegations hurt share prices, the stock had nearly fully recovered before Ackman’s attacks against Herbalife. I believe the pattern is bound to repeat for NuSkin, and the recovery is only just starting. Fundamentally, the company is strong.
NuSkin has consistently reported strong revenue growth. Over the last three years, revenues have increased 14.5% on average. This is led by the company’s strong expansion into China and the rest of Asia. A more personalized sales touch is preferred in the emerging markets, and as a result Asia now contributes more than three-quarters of NuSkin’s revenues.
The company also sports excellent profit margin growth. The company has improved net profit margins every year since 2006 except last year, when it fell just 10 basis points. It’s important to see that margins are improving as revenues grow. This implies that sales aren’t inflated by new stores or new salespeople, and actually represent an increased demand in their products.
Moreover, NuSkin’s balance sheet is fantastic. The company has a debt to equity ratio of just 0.38 compared to Herbalife’s D/E of 1.95. Its excellent debt position is also seen in its quick ratio (1.3) and current ratio (2.0). In other words, NuSkin is funding its growth with mostly equity, and managing its debt quite effectively. That means the company’s 38.9% return on equity is not overly inflated by debt.
The Weighing Machine
Presentations and theatrics like Ackman’s last month are kind of like ballot stuffing. I’m not saying Ackman is a quack, he’s certainly a successful investor, but the hype he generated around MLM businesses may have been over kill, causing the market to act irrationally. As a result, I believe long term investors may have been presented with an opportunity, and will inevitably find more opportunities from announcements like these in the future.
adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!