Recently, respected short selling firm Citron Research wrote a bearish article on Nu Skin (NUS) that caused the stock to drop over 10% in a couple days. The basis for Citron's bear attack is that multi-level marketing (MLM) schemes are illegal in China, and since Nu Skin is operating an MLM there, then the company is at risk of losing all business in China and getting its assets seized (as a worst-case scenario).
ON CNBC today, Andrew Left from Citron Research had a debate with NUS bull Bill Schmidt, senior research analyst at Deutsch Bank.
There was lots of new, useful information to get out of this debate from Bill Schmidt. Andrew Left highlighted his article. The following are highlights from the debate.
Andrew Left: "If you look at my diagrams on my website, you can see reps drawing out pyramids when recruiting. If you look at info from a recent convention in Hong Kong, they most definitely run an MLM in China. They get paid for recruiting sellers down the pyramid, which constitutes an MLM scheme."
Schmidt: First off, the big recent revenue boom in China and the convention was for their new product which they marketed heavily. That recent revenue boom in China isn't sustainable.
Left: That new "great" product was refused admission this last spring here in the US per the FDA.
Schmidt: That's not true. The product hasn't been approved yet by the FDA. That is a factually incorrect statement.
Schmidt: And as far as the MLM structure in China, all the Nu Skin distributors who get commissions in China are salaried and get health care and benefits.
Left: Nu Skin has had regulatory problems all over, North Korea, Japan, etc.
Schmidt: The executives of Nu Skin helped script the direct selling law in China. They sat down and helped write it. So they aren't going to get thrown out of China.
My analysis of the debate is that Andrew Left got worked pretty badly. He had no specific rebuttals to Bill Schmidt, but Mr. Schmidt had some for him. It is clear to me that Mr. Schmidt knows the company much more intimately than Mr. Left does.
What I found most interesting, is that Mr. Schmidt said all Nu Skin commissioned distributors in China also get salaries, health care and benefits. Does that sound like a typical MLM, pyramid scheme distributor in the United States?
I invite all NUS bears to respond to this article and state their point of view. I am long NUS, but I always welcome contrary opinion. Also keep in mind that I read Citron's articles, and I still believe they are one of the best short sellers in the world.