High Short Float but Cheaply Valued

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Be fearful when others are greedy, be greedy when others are fearful” 

Warren Buffett

That is the key to wealth. When good stocks with high insider ownership are on sale, investors should bet on them. In order to find such opportunities, I create a simple stock screen with four main criteria: (1) market capitalization is greater than $100 million, (2) short float is more than 25%, (3) insider ownership is greater than 20% and (4) EV/EBITDA is less than 5x. Here are the only two results:

USANA Health Sciences (NYSE: USNA) is the multilevel marketing company promoting nutritional and personal products. USANA generated nearly 75% of total sales outside the US. In fiscal 2011, more than 35% of the total revenue was generated from Greater China, whereas 19.2% was from Southeast Asia/Pacific. The company reported that sales were made mainly to independent Associates and Preferred Customers. The company had a diverse customer base, as no single customer represented 10% of net sales in 2011. In the past 10 years, USANA has consistently generated more than 30% return on invested capital. The trailing twelve months ROIC was 34.3%. 

USANA has a high insider ownership. According to the recent 14A filing, the founder and chairman of the Board, Myron Wentz, owned 52% of the total shares outstanding. David Wentz, Myron Wentz’s son and the CEO, owned a 4.7% stake in the company.  Currently, the short float ratio of the company is quite high, at more than 55%. At the current price of $37 per share, the total market capitalization is around $463 million.

The market is valuing USANA at 4.68x EV/EBITDA. USANA has the cheapest valuation in comparison with other multilevel marketing companies, including Herbalife (NYSE: HLF) and Nu Skin Enterprises (NYSE: NUS). Herbalife is valued at 6.9x EV/EBITDA, while Nu Skin has 6.9x EV multiples. Herbalife has been in a hot seat recently. Activist investor Bill Ackman said Herbalife was a pyramid scheme, and he set a $0 price target for Herbalife. In contrast, Dan Loeb, another hedge fund manager, has considered Herbalife as a great investment opportunity. He thought Herbalife was worth $55 - $68 per share. The short float of Herbalife is nearly 35%, lower than the short float of USANA. Among the three, Nu Skin has the lowest short float of 17.04%. 

Blyth (NYSE: BTH) is the direct to consumer business focusing on fragrance products, decorative accessories, nutrition supplements and energy drinks. The majority of the company’s revenue was generated from the Direct Selling segment, which accounted for 78% of the total revenue in 2011. The Catalog & Internet segment ranked second, accounting for 15% of the total revenue. In the past 4 years sales have been decreasing, from $955.8 million in 2008 to $796.6 million in 2011. The principal Direct Selling segments are PartyLife and ViSalus. In 2011, the Direct Selling segment’s net sales increased $141.4 million, which was attributable to a $192.6 million increase in ViSalus’ net sales and offset by a $50.3 million decrease in PartyLife’s net sales. Blyth reported that the growth in ViSalus’ sales was due to an increase in promoters from 8,000 last year to more than 59,000 this year.

Blyth has a high short float at nearly 45%. It also had a high insider ownership. Robert Goergen, CEO and Chairman, owned more than 3 million shares, which accounts for 35.2% of the total shares outstanding. Pamela Georgen, the Chairman’s wife and Director, holds an 8.2% stake in the company. Robert Georgen Jr, the Chairman’s son, holds a 9.6% stake. At the current trading price of nearly $15 per share, Blyth’s market capitalization is $257.5 million. The company has quite a cheap valuation of only 1.6x EV/EBITDA.

Foolish Bottom Line

Both USANA and Blyth seem to be good stocks for value investors. Even though USANA had a higher valuation, it has consistently generated quite a high return on invested capital. Nevertheless, multilevel marketing companies generally have to face with a lot of potential legal risks. Investors need to look closer to find a suitable for their own portfolios.

hoangquocanh has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $50 Calls on Herbalife Ltd.. 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!

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