Shake it up

Polar bear shake
Flickr
Sponsored By:

Even If Herbalife Is Legit, Its Stock Is Nothing But Trouble

Herbalife (HLF), the nutrition and diet-shake company that has been the target of a hedge fund tug-of-war for several months now, seems to finally have been vindicated after allegations that it is a pyramid scheme.

A survey from the iconic research firm Nielsen Co. determined that nearly 8 million Americans purchased a product in the past 90 days.

But whatever the study shows, the real questions that investors should be asking themselves is whether Herbalife can grow those sales (and its profits) enough in the future — and more importantly, whether this sales data is actually news that changes things or simply a validation of growth already baked into shares.

I’m of the mind that even if Herbalife can prove its sales numbers are accurate and its business honest, that doesn’t change the fact that HLF is a bad buy right now.

I’ve never really felt comfortable with Herbalife as an investment, mostly because of the nature of a “diet fad” momentum stock like this. As I wrote in April, diet stocks Medifast (MED), Weight Watchers (WTW) and NutriSystem (NTRI) all had periods of hot growth and subsequent selloffs. All three have underperformed the market so far in 2013 — with Weight Watchers logging a steep 15% loss despite a big move for the S&P 500 in the other direction since Jan. 1.

It has nothing to do with whether HLF is a scam, in other words. It has to do with whether Herbalife’s weight-loss shakes are simply the latest fitness craze that will invariably fade when tastes change.

Think Tae Bo pushing Billy Blanks to fame and fortune, or the Adkins Diet explosion, or even the Thighmaster.

It’s the nature of these fads to fade. Americans love the idea of getting in shape — and some even manage to do it — but eventually new items come along, and the public forgets about the old ones.

This is not to say Herbalife can’t succeed. Momentum still seems to be on its side, since the results of the Nielsen study recently were significantly higher than a 2012 study from Lieberman that found that 5.6 million households had purchased a Herbalife product in the past 90 days.

The jump to 8 million is a significant improvement — and not that much of a surprise, considering year-over-year revenue has grown like clockwork every single quarter since 2009. Annual sales have doubled in the past four years, and profits have tripled.

And bigger-picture, nutrition and fighting obesity are big-time growth areas in America. There’s plenty of room in this market even if other players come along.

But the fact is Herbalife is very volatile, and with 47% of shares held short as of a month ago, there’s little sign of that volatility letting up. Besides, outside of the give-and-take of the market in general, you still have the ego wars of Wall Street heavyweights Bill Ackman, Carl Icahn, et al to deal with.

Nutrition and weight loss might be a growth business, but the underlying risks seem too much to warrant taking on a position in Herbalife right now. With the market up 14% year-to-date in 2013, you have plenty alternatives to profit beyond a volatile small-cap stock selling weight-loss shakes through direct marketing amid claims of fraud.

Aggressive traders with a high risk tolerance still might be able to make a pretty penny in Herbalife. But most of us should sit this one out — even after this recent Nielsen study.

Related Reading

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

Get The Slant delivered to your inbox every day!

Comments
  • Dan

    “diet fad” momentum stock” ?? You’ve completely missed the point of the entire company! Best do some research and report back.

  • dude

    Fad??? The company has been in business for over 33 years!! Do you call that a fad? Dumb.

  • Anonymous

    Weight loss products do not nicely fit into typical supply and demand curves which does make them vulnerable to scams. Alternatively, those with value to customers can be successful and some products with extraneous support that promote success can become viable business models.

  • Ruzlina Hasan

    I used Herbalife in the 80s in the UK. good product but very expensive.. Only those in early made any profit. Had to start by introducing to family and Friends. Downliners didnt make much if any.. but had to buy in.. I would say it is a twist on the Pyramid .. Buy at 40% off listed price and then resell build a network.. Try buying without recruitment !!.. BUT yes see DUDE… not a fad good product if you can afford it.. and keep with it.. This reporter as you say should do his homework before writing anything..

  • SERGE

    There are many complaints about the company using deceptive sales practices or how the products are not affective. Why not see for yourself how it all works. From my point of view every business or occupation functions as a pyramid. The bosses and Managers at the top and the employees at the bottom. So why call the company a period scheme. I don’t know about you but seeing is believing. That is one of my Phrases. More info… http://adf.ly/Qdr0D and http://www.herbalife-nutritional.blogspot.com/

  • anonymous

    small cap stock? HLF has a 4 billion market cap!