I've been following Natural Health Trends Corp (OTCQB:NHTC) for the past few months. It's a multi-level marketer [think: Herbalife (HLF)] which derives 90%+ of its revenues via Hong Kong/China. And it's been growing like a weed (223% to 579% depending on whether you look at revenues or earnings, respectively, in the most recent quarter). And it is currently selling for less than 5X recent quarter run-rate earnings (at 10/22's closing price of $9.50).
My first go-round with NHTC
I previously bought NHTC in late July after it came out with a 10-Q showing $0.49 EPS, and the stock went down. That EPS figure positively surprised everyone who follows the stock. So when the stock went down after this news, I bought it for $10.46. And then to my slight chagrin, I watched it go down as low as $9.04 (-14%) the next day.
It took eight trading days for NHTC to get back to my buy-in price. I felt like the stock should appreciate to $14-$15 after the earnings report, and I thought it would take three weeks to a month to do so. My precise prediction turned out to be quite accurate: NHTC was worth $14.05 per share at the end of August. What I didn't anticipate was the amount of upside that would occur after that initial month was up. The stock ran up to a high of $21.99 on September 8 right before taking an amazing dive that same day down to $11.77, to close at $12.98. The stock has bounced around from $9 to $15 since then, with a general trend downward.
I sold my shares at $14.25 on August 28, prior to the following week's run-up and plummet-down, for a 36% gain in 29 days -- my thesis near-perfectly realized.
Fast-forward to now: until recently, I had stayed out of the stock. I watched how the shorts had taken it down once it made its run up above $20 and that did not make me super eager to get back in, despite a price at times below the one I had initially paid.
And then in late September, the Hong Kong protests started and George Broady, 33% owner, appeared to sell a handful of shares. Upon further investigation, I realized that the shares were labeled Code G on his Form 4, meaning they were a gift. The shares only amounted to 1.5% of his stake, anyway.
Hong Kong protests
The only new risk I see in the stock is the potential impact of the Hong Kong pro-democracy protests. There may well be no impact at all; I just don't know. What I do know is that the protests locked down parts of Hong Kong for weeks, and disrupted local business and transportation. If NHTC's Hong Kong affiliates normally travel back-and-forth to China, I don't know if they would have been disrupted.
Q3 sales match Q2, market doesn't react
Then, a piece of news tipped the scales so that I bought back in: on October 14, NHTC pre-released their Q3 sales numbers. They estimate they did $31.8M in sales in the quarter ended September 30. This is important because it shows that Q2 ($34.2M) was not a one-time event. The Q3 number is up 124% from the year-ago quarter. Furthermore, if you adjust for deferred revenues going into this year's Q2 and Q3, Q3 may have even been a little stronger than Q2.
So, the knowledge that NHTC has had a second $30M+ quarter in a row gave me conviction to buy back in at $10.77, a price that I was surprised to see the stock trading at in the wake of the good revenue news. Well, guess what has happened since this good news came out? That's right: the stock has fallen by as much as 28% since October 14! It's back up to $9.50 at the time of this writing, which I still view as pretty absurd in spite of the risks, outlined below:
MLM + China = discount
The key reason that Natural Health Trends is bound to trade at some sort of discount is that it combines two "sectors" which investors view as risky: multi-level marketing [MLM] and China. I don't think these risks justify the present price, or else I wouldn't own the stock, but I do understand that where there is perceived risk there ought to be some discount applied.
What do I know about multi-level marketing?
I am no MLM guru, so I can't say much about it except that it is my understanding that both growth and shrinkage can occur very rapidly in the sector. Most investors won't touch MLM stocks, but those who passed on NHTC a year ago "because MLM is too risky" missed out on a quadrupling of their capital. The business model was the same then as it is now. It is risky to miss out on upside. I think that is called opportunity risk.
Some MLM companies grow like weeds, some implode; how can I tell which will do what? What I do know is that when a company releases good news and its stock goes down, and it is already cheap, I am at the very least intrigued.
The China issue: pay the gatekeeper
The biggest risk that I saw when I first looked into NHTC, was the fact that so much of their business was being done, in the end, in China. And yet they had not been able to obtain a direct-selling license. This is an issue that was played up by Seeking Alpha author GeoTeam recently to try to substantiate a short case. The whole saga was pretty entertaining, especially considering their holy grail of "evidence" was a year-old online article written in Chinese, that was probably never read by anyone except GeoTeam and a couple of us who were following the story. Hopefully for GeoTeam's sake they've locked in their profits recently.
Basically, to play ball in China, you've got to grease the right wheels. Everyone knows this. And guess what? NHTC knows this, too. Those who follow the company closely know that NHTC is developing a $10M facility near Macau (in China) from which to do business, light assembly, train affiliates, etc. Why is this relevant? Because this investment into China is the counteraction to NHTC's up-to-now inability to obtain the direct selling license. This facility is the payment that ought to unlock China for NHTC.
On the Q2 conference call, President Chris Sharng talked about this investment:
Ten million dollars, or so, of the cash [on the balance sheet] is going to move into China for business development with the potential of helping an application in the future for a direct selling license in China...
Our plan is to move that cash into China in the next twelve to eighteen months...
I think it will be very good for the long-term for the Chinese business. Not to mention the fact that I think the government at the local and the central level will love to see that kind of infrastructure investment: that we are in it for the long haul.
As of June 30, NHTC had $29.6M in cash and no debt.
What's coming up
NHTC has announced that they will hold a conference call at 10am on Wednesday, November 5, to go over Q3 results. I would expect the 10-Q after the bell on November 4.
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