The investing sentiment pendulum periodically swings to the positive side beyond reasonable optimism. When this occurs, a bear or short opportunity exists in the equities impacted by this overly positive pendulum swing, once described by former Fed Chairman Alan Greenspan as "irrational exuberance."
Conversely, when the sentiment pendulum for equities as an asset class, for a market segment or for a particular stock, swings too far to the negative side, buying opportunities are created. The pendulum has swung too far to the negative side in the case of several well constructed and well managed businesses in the direct selling or multi-level marketing industry.
While an industry that is never far removed from controversies, the onslaught wrought by a noted short seller against Herbalife (NYSE:HLF) beginning at the Sondheim Conference in late 2012 has resulted in a significant "piling on" by various regulators and commentators, some seemingly in the pockets of the short sellers themselves. It was not long after Senator Markey from Massachusetts called for an investigation into Herbalife that questions arose about the timing of his announcement vs. the timing of Pershing Square/Ackman describing that announcement.
Shortly on the heels of the Markey request for the FTC to investigate, Illinois Attorney General Lisa Madigans' office announced their own investigation into Herbalife business practices. Meanwhile, across the globe in China, an investigation into the business practices of Nu Skin (NYSE:NUS) sent shares of that direct seller and peer companies plunging. The pile on, it seemed would continue to accelerate.
Nu Skin's recent resolution of the Chinese investigation, with payment of only a very small fine indicates that the sharp selloff in Nu Skin shares since the time of the investigation announcement was severely overdone. There is light at the end of the tunnel, and the seemingly endless barrage of negatives now begins to have a counter.
Shares are likely to recover quickly. China is very important to Nu Skin. Nearly 40% of Nu Skin's revenue comes from the greater China Region. The above referenced resolution of the probe by Chinese officials allows that floodgate of business to re-open for Nu Skin.
USANA Health Sciences (NYSE:USNA) shares were caught in the industry downdraft. USANA shares which fetched over $90 last fall are now trading in the low $70's. The Chinese investigation of Nu Skin directly impacted USANA's Chinese business, according to management. The Nu Skin resolution with Chinese authorities will likewise have a positive impact on USANA.
CVSL (CVSL) is my personal favorite in the segment. John Rochon of Richmont Holdings is a proven winner in the direct selling field. The CVSL concept of acquiring numerous companies in the direct selling industry, providing these companies with added management skills and back office efficiencies makes a great deal of sense. CVSL is well positioned to capitalize on the moment of travail from which the direct selling industry now begins to recover.
The swinging of the pendulum back to the positive side has begun. A 9th Circuit Court Ruling recently handed down in the case of Burn Lounge, would seem to validate a basic belief of the direct selling industry, the belief that sales to participants in the organization are legitimate sales.
The bears will of course contend that the 9th Circuit Court ruling supports the negative. After all, the ruling did support the lower court finding that pyramid laws were violated by Burn Lounge. The key direct sales supporting factor was the court failing to find fault with sales to members, or internal consumption by the network. As a long time industry professional, I personally subscribe to and support the view that internal consumption is in fact a true product demand. This, coupled with the above referenced Nu Skin Chinese solution, argues that the inevitable swinging of the pendulum back to equilibrium has begun.
The sentiment pendulum for direct selling shares has swung too far to the negative. The "piling on" has been relentless, yet the best direct sellers continue to show impressive revenue and profit growth. The piling on may continue for a season. There will be moments of controversy and volatility, billions are at stake for large well heeled and sophisticated investors on both sides of these trades.
Share prices of NUS, HLF and USNA are poised to rebound over the coming year as the regulatory dust settles. There will likely be new direct selling industry regulations. Good companies will flourish in the newly clarified regulatory environment.
CVSL, while today small in comparison to the other companies referenced above, is well positioned in the market place to acquire good companies at attractive prices. When recently I queried a member of management about where the acquisition candidates were being located, the response was sure and confident. "Our phone is ringing".
The upcoming Cantor Fitzgerald-led offering and anticipated up listing to the NYSE will make CVSL shares attractive to large groups of investors who do not invest in thinly traded secondary market listed shares.
Disclosure: I am long CVSL, HLF. 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.
Additional disclosure: I am not a distributor for, or an employee of any company referenced in this article. I wrote this article as an investor. The company of my own affiliation is privately held.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.