Herbalife, Loeb, and Ackman: What to Do?

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Direct selling companies have always had a strange, ill-defined place in the markets. They don't meet typical expectations for a company, yet somehow they're always out there. Throw in that often you'll find that a social connection, a friend, or family member, will suddenly become a commercial connection through selling some form of direct sales products and the discomfort grows.

Still, many of them seem to do well. Herbalife (NYSE: HLF) certainly seemed to be doing so. The company has been around for decades selling its weight loss products through a network of individuals. Over the last five years, the stock has risen from $20.21 to a high of $73.00 and it tripled the dividend over that time. Of course, it's not there now. That's the issue.

Herbalife, and several other multi-level marketing firms, have taken it in the neck for the last few weeks. Major hedge fund leader Bill Ackman, of Pershing Square, announced that he considered it nothing more than a pyramid scheme and that he was shorting $1 billion worth of the company. That means he expects it to drop and drop precipitously. When that happens he'll make a bundle of money for his investors. Herbalife management fought back, of course, stating that the firm is no sort of pyramid scheme and provides quality products around the globe. Herbalife's stock dove on the news.

Then another hedge fund manager, Daniel Loeb of Third Point, took the other side of the bet, announcing that he'd committed $300 million that Herbalife's stock would go up. It did on the news, recovering most of what it had lost previously. Oy. What's a small investor to do when the big boys play their games?

Stay away, mostly. At this level, we see Loeb and Ackman playing on the doubts that most of the public has about multi-level marketing firms. Just the fact that they're commonly called 'schemes' might be enough to make someone leery of investing there. Ackman, in particular, has been beating the drum. There's a power-point presentation out there with a god-awful number of slides explaining why he's short on the stock and he's advertising on Google about it. All of that is designed to tank the firm's stock so that he can cash in.

Still, there are a lot of firms out there that use a similar model that insist they're providing a service or product using a non-traditional marketing and distribution format. Some are good and some are bad, but the fight between Ackman and Loeb has impacted some of them poorly.

Nu Skin (NYSE: NUS)

Nu Skin sells nutritional supplements and anti-aging products through its network of distributors in more than 50 countries. It famously had a battle with Citron Research, another firm that does short selling, last year that gave Nu Skin's stock problems, dropping it by a third. But the firm controlled the damage … until Ackman made his announcement about Herbalife. Now, the stock dropped by 25% and then recovered a lot, all in the last month. The fundamentals of the firm aren't bad, exactly, and it does pay a 20 cent per share dividend. But two major shocks in the last year are enough to make me nervous. I'm avoiding it for now.

Nature's Sunshine (NASDAQ: NATR)

Another company that uses MLM to sell health and wellness products, Nature's Sunshine is a smaller player in the MLM space. There's some indication that the company is beginning to prepare for better times. That's a good sign. Of course, the stock got hammered as a by-blow of the Herbalife fight. On Dec. 18, 2012 it was at $15.44 and by Dec. 26 it was down more than 10% to $13.02. It's since recovered by I think it'll be in for a bumpy ride as MLM firms get more media interest and bad press. Be cautious but some risk-oriented money might be appropriate.

Avon (NYSE: AVP)

The one truly household name on this list. Admit it, you've heard of it and know people who use its products. Avon is well-established, generally well run and not considered by most to be a MLM company. It's at the point where people are no longer wary of it, but instead consider it a standard part of life. Instead of getting press when something goes wrong in the MLM world, it gets ink when it does typical corporate things like trimming payroll to increase the bottom line. Avon's stock has completely ignored the craziness that has given MLM firms a hard time this month. It's up about 14% in the last few weeks without the wild ups-and-downs that the others have. I like the stock and consider it a good play.

In summary, Herbalife and other big MLM firm stocks are a game the small investor can't predict and should avoid for the short term. Let Ackman and Loeb fight it out. Perhaps they'll both win. But neither of them are going to do a thing for you. Instead, if you want to be involved in direct-sales stocks, go with Avon or put a small amount into Nature's Sunshine. Try to avoid chaos and unpredictability where you can. Good luck!

Follow Nate on Twitter: @natewooley

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Nate Wooley 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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