Nu Skin is under investigation in China for its marketing practices. Bill Ackman may want Chinese authorities to look into Herbalife. And that could make him a lot of money.
Ackman, who famously took a $1 billion bet against Herbalife back in December 2012, is said to be planning a presentation making the case that Herbalife is operating illegally in China. This comes as Chinese authorities said they would investigate business tactics of personal care products maker Nu Skin.
Like Nu Skin, Herbalife relies on "multilevel marketing" (MLM) – where salespeople recruit others to sell their products – which Ackman says is basically a pyramid scheme that will eventually collapse. He is believed to have already lost about half of the $1 billion he risked when shorting Herbalife stock a little over a year ago. He has also publically clashed with one of Herbalife's largest shareholders, Carl Icahn, over the value of the company.
From the time Ackman announced he was short the stock to the time China announced its investigation of Nu Skin, Herbalife shares were up more than 80%. Since Wednesday, Herbalife shares dropped 11% as investors feared the potential that Herbalife would be the People's Republic of China's next target.
According to CNBC contributor Andrew Busch, editor and publisher of The Busch Update, there are some differences between Nu Skin and Herbalife when it comes to China.
"Nu Skin was very aggressive over the last couple of years going into China," says Busch. "With Nu Skin, this was a problem because 50% of their earnings come from China. It was accelerating… Herbalife, not so much. Only about 10% of their revenue comes from there. So, it’s not as big of an impact but it was growing."
However, Busch says this latest investigation may nonetheless spell trouble for Herbalife, as well as other companies using multilevel marketing.
"It really calls into question the whole business model of not only Nu Skin and Herbalife, but all the MLMs there," says Busch. "You've got to be very careful with them (Herbalife) and I would be staying away from this stock."
According to Steven Pytlar, Chief Equity Strategist at Prime Executions, Herbalife's shares are being supported at a specific price, $68.50.
"Back in December, we saw a major buyer come in at that level," says Pytlar. "Then, on yesterday's negative news that sent the stock lower, we still saw very heavy buying interest right at $68.50. That tells us there's still a very interested buyer at those levels."
How the market reacts should the price fall a little more to $68.50 again over the next few days will determine what's next for Herbalife's stock.
"If we're able to hold $68.50 over the next few days, it could be an indication that people are willing to hold on to their shares of Herbalife and you could actually see it start to rise back towards the old high," says Pytlar. "But, the risk is so great that if the buyers capitulate and it moves below $68.50, that it's really worth being patient this time and seeing how it reacts."
Busch believes that there is one way stocks could break below Pytlar's support level.
"Any other bad news for Herbalife and MLMs, and the stock will blow through that level," says Busch. "It's an event-risk type company right now."
To see more of Busch on the fundamentals and Pytlar on the technicals, watch the video above.
More from Talking Numbers:
- Bill Ackman
- Nu Skin