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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.

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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.

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