USANA Health Sciences Cockroach Theory: Buyer Beware

| About: USANA Health (USNA)

Shares of USANA Health Services (NYSE:USNA) are taking a hit following an 18 page report and allegations from Citron Research. According to USNA's website, "USANA develops and manufactures high quality nutritional and personal care products that are sold directly to Preferred Customers and Associates throughout the United States, Canada, Australia, New Zealand, Hong Kong, Japan, Taiwan, South Korea, Singapore, Malaysia, Mexico, Philippines and the United Kingdom. Additionally, USANA's wholly-owned subsidiary, BabyCare, Ltd., operates a direct selling business in China."

Multi-level marketing. China. And now we learn of undisclosed arrests. USNA could take it on the chin if the allegations are true.

These are buzz words that make for a good shorting opportunity (and a selling opportunity for longs). Right now shares are difficult to borrow; at last count there were over 4 million shares short in a float of a little over 6 million - around two-thirds of the float short. This does suggest that some bears have been quietly shorting and knew about problems at USNA well in advance. The best, and possibly only way, to play USNA on the short side is with some put options. I personally am taking on some extra risk and went with the out-of-the-money (at the time) $40 Dec 2012 puts, giving me a full 3 weeks of opportunity before expiration for this story to unfold and the media to catch wind of it.

This isn't the first time questionable, eyebrow-raising drama occurred with USNA. On 10 May 2011, it was announced that 4 of USANA's executives (President and COO Fred W. Cooper, CFO Jeffrey A. Yates, EVP of Sales Mark H. Wilson, and VP of Finance Riley Timmer) had unexpectedly resigned from their positions at the company to pursue an unspecified business opportunity. Say what? In 2007, USNA was the subject of an SEC inquiry, While no charges were filed, due to lack of evidence, its auditor, Grant Thorton, resigned over disagreements with the company. Now there's trouble in China. Trouble seems to follow USNA far too often.

These revelations beg the question -- what else might USNA be hiding? Is there accounting trouble? Will this spark a US-side DOJ or SEC investigation, along with the associated legal expenses? I expect as information comes to light it could have a dramatic negative effect on the stock price. Investors can try to capture profit from this by buying puts. Less risky ones would probably be the April 2014 $50 put options. I may buy some of those as well. Bottom line here is that this stock, at the very least, is in my opinion a "must avoid." There is a "cockroach theory" when it comes to investing: If you see one roach, there are probably many, many more hidden that have yet to be found. That is likely the case with USNA, as with many other shady stocks doing business in China. Buyer beware!

Disclosure: I am short USNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.