In The Herbalife Ltd. (HLF) Aftermath, Should Investors Buy Multi-Level Marketing Companies?

Page 1 of 2

With all of the uncertainty surrounding Herbalife Ltd. (NYSE:HLF), thanks in part to billionaire Bill Ackman’s barrage of attacks, we decided to dig a bit deeper and look at the multi-level marketing company industry. The major MLM companies include a few of Herbalife’s key peers: Avon Products, Inc. (NYSE:AVP), Nu Skin Enterprises, Inc. (NYSE:NUS), Weight Watchers International, Inc. (NYSE:WTW), and Medifast, Inc. (NYSE:MED).

Bill Ackman PERSHING SQUARE

Herbalife has been beaten down over 30% the past week mostly due to short positions announced by Bill Ackman of Pershing Square Capital and Whitney Tilson of T2 Partners. Being called into question are Herbalife’s business practices. In a detailed presentation, Ackman questions Herbalife’s sustainability given its above-average product prices, minimal R&D spending and virtually nonexistent product advertising (check out Bill Ackman’s newest picks).

Ackman has trouble understanding why Herbalife’s products are so successful, especially when the company “spends ‘de minims’ dollars on advertising.” In his opinion, Herbalife is a big supporter of its name and logo, but not its products. This is the foundation of Ackman’s argument: that Herbalife is hiding its true motives and practices, where he believes the company is spending an out-sized amount of its retail profits on recruiting rewards – well in excess of the 50% allowed by the FTC.

The pressures on Herbalife and its peers stem from the fact that there is a fine line that MLM companies must toe in order to avoid being labeled a pyramid scheme. The FTC defines pyramid schemes as operations that rely on continual recruiting as opposed to product sales.

Worth noting is that despite all of the concerns that Ackman has brought to light, he has failed to drag down the entire MLM industry as far as HLF has fallen. Herbalife is down 40% over the past month and other major peer Nu Skin is down 25%, but Avon is down only 2%, and Weight Watchers (-7%) and Medifast (-13%) are down close to double-digits.

So what can investors do?

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!