The market sometimes behaves in a way that is difficult to explain. What would you say if you see a stock going down 40% within days of completion of a share buyback program? Add to that factors like absence of negative news, quarterly earnings beating street expectations and you have an intriguing situation denying logic.
This is what happened exactly with LifeVantage (NASDAQ:LFVN), a company that sells dietary supplements.
Initially known as Lifeline Therapeutics, LifeVantage is a Utah-based company formed in 2004 and listed as a publicly traded company in June 2012.
LifeVantage offers nutraceutical dietary supplements that promote health and work to provide protection from chronic disease. The company's lead product - Protandim provides relief from stress by activating Nrf2, a sequence-specific DNA-binding factor encoded by the NFE2L2 gene. Nrf2 is the primary defense against cellular oxidative stress. Also known as nuclear factor, it increases the expression of several antioxidant enzymes.
True Science® is an anti-aging cream with the same ingredients as that of Protandim. The company also offers LifeVantage Canine Health, a specially formulated supplement for dogs.
The company reported quarterly revenue of $51.33 million for the period ended September 30, 2013 and a net income of $3.26 million against a net loss of $182,000 in the quarter before that. Revenue for fiscal year ended June 30, 2013 was $208.18 million, a quantum jump from $126.18 million reported in the prior year. Net income for the FY 2013 was $0.09 per share.
Adding shareholder value
In an effort to increase shareholder value, the company announced a share buyback program in December 2012 for repurchase of its common shares to the tune of $5 million. In March 2013, this was increased by another $5 million.
In September 2013, the company adopted the Dutch auction route for buying back $40 million worth of its common stock in the range of $2.45-$2.80 a share. The buyback was successfully completed with the tender offer being oversubscribed - a total of 20,026,222 shares offered. The company will accept and pay for the shares on pro rata basis - 81.3 shares for every 100 offered.
The quarterly earnings beat street expectations and a share buyback is considered to be a big positive as it increases shareholder value. Despite there being no negatives, the market has beaten down the stock, something that beats logic - the recently concluded share buyback program by itself was expected to result in a 13% to 15% upside in share price.
What defies logic even more is that the company has plans in the pipeline to spend $60 million for buying back more shares.
The second share buyback program was completed in October end and the quarterly results announced in the first week of November. Within this period, the share price of LifeVantage fell by more than 22%. Between November 15 and November 20, 2013, the stock fell by 15.46% but recovered by 6.1% the next day. The stock now trades at $1.74 (end of trading November 21, 2013) down more than 43% from its 52-week high of $3.07 achieved in January 2013.
Looking for answers
LifeVantage distributes its products through a multi-level marketing (MLM) model. On November 20, 2013 the company announced that it had terminated for cause a distributor, Jason Domingo and Ovation Marketing Group, Inc. and has filed a lawsuit against it for breach of contract and misappropriation of funds."
Here lies the answer.
The distributor, for reasons best known to them, is dumping one million shares in the market, which is driving the share price down.
A lifetime opportunity
LifeVantage has an innovative product for the highly fragmented but fast growing multi-billion dollar market for anti-aging products. Already, the company's revenue has grown from $38.92 million in FY 2011 to $208.18 million in FY 2013. In addition, MLM companies are traditionally profitable. It has no long term debt and utilizes cash on its balance sheet for adding shareholder value.
LifeVantage is in its early stages with adequate scope for organic growth. As of now, besides the domestic market, the company sells its products only in Mexico, Japan and Australia with plans to explore newer international markets in the near future.
There has been no change in fundamentals of the company and the stock price is being beaten down due to extraneous factors. The growth potential of LifeVantage is intact and the current downside in stock price should be considered as an investment opportunity - an once-in-a-lifetime type - for the long haul.
Disclosure: I am long LFVN.
Business relationship disclosure: My fiance is an active distributor for about one year. She is a level 3 distributor out of 10 rankings. I am also a distributor for about a year, and at the same level. I have not been active for 9 months and do not intend on being active going forward. I still get monthly royalty checks and use all their products and have no intention of stopping their use.