Avalon Research says "sell" direct sellers in China

Barron's interviewed (subscription required) contrarian investor Michael Margolies of Avalon Research Group. Here are key quotes regarding the prospects for multi-level marketing companies in China:

....China is very interesting. We've got sell recommendations on Nu Skin (ticker: NUS) and Herbalife (ticker: HLF), which has recently run up. They are direct sellers in China. Herbalife and other direct sellers met recently with the U.S. Secretary of Commerce to lobby for a multi-level marketing compensation structure in China. We think multi-level marketing will be ruled out in the final regulations in China. Multi-level marketing, where you enlist a distributor underneath you and they enlist two distributors underneath them and so on, is one thing the Chinese government probably wouldn't want because these companies typically hold big assemblies and rallies to motivate their salespeople. But Herbalife thinks direct selling regulations will be added in 90 days or so, and license approval could take until the end of 2005 or 2006.

....In the meantime, they are building retail stores. They expect to lose about $10 million in China this year and that is probably a low estimate. There will be some earnings disappointments from China in 2005 and 2006. Even the bulls expect revenue growth of only 5% because of weak or negative growth in the U.S., Japan and Korea. That's pretty low for a growth stock. Most of the earnings growth will come from a drop in amortization and interest expense and a change in the tax rate.

Comment: Barron's interviewed another member of the Avalon Research team a couple of weeks ago. See here for David Hines' concerns about Nu Skin (ticker: NUS) in China.