Nu Skin: Time to Throw in the Towel?

Shares of Nu Skin (NUS) continue to plunge after the Wall Street Journal reported that China would investigate allegations that the multi-level marketer is a pyramid scheme.

Reuters

Yesterday, the People’s Daily ran a story accusing the company of using sales techniques that bordered on brainwashing. While the story can be easily dismissed–and was–the fact that China is investigating cannot.

So says Canaccord Genuity’s Scott Van Winkle and Mark Sigal, who downgraded Nu Skin to Hold from Buy today. They write:

While we found yesterday's article to be the type of complaint multi-level marketers often face, we believe that any government investigation in China opens questions that we can't forecast. Even with laws to provide a path, we don't believe that anyone can predict the Chinese government in this instance.

Lowering rating to HOLD from Buy to reflect a new level of risk in China, which at roughly one-third of our 2013 revenue forecast is a large enough market to significantly impact not only the financial results but also the valuation.

Nu Skin has plunged 20% to $92.52 today at 10:51 a.m., and has dragged down other multi-level marketers with it. Herbalife (HLF) has dropped 5.9% to $74.74, while Usana Health Sciences (USNA) has fallen 9.1% to $59.77.

Maybe it’s because China is a heck of a lot bigger than Belgium? Remember, back in December, a Beligian court ruled that Herbalife was not a pyramid scheme, which had some bulls acting as if the debate was decided. China, however, is a much bigger beast, and if it come to the conclusion that Nu Skin is indeed a pyramid scheme, it’s not impossible that the issue will become front and center for other multi-level markers again.

I’ll leave you with a piece of a Citron Research report on Nu Skin from Oct 2013, that reminded investors that China’s newspapers were already looking into the case of Nu Skin even as the company was in the midst of a 275% rally. It warned:

…the government is aware of the Nu Skin issue and more importantly aware that it is a problem in Chinese society that will eventually be addressed. In the case of Nu Skin, this could easily be sooner rather than later, as it is a foreign company corrupting its citizens while its U.S. management has no direct accountability to the Chinese Government.

UPDATE: The day isn’t getting any better for Nu Skin. Shares have now dropped 28% to $82.61 at 2:41 p.m. and been halted numerous times. MarketWatch has the details:

Shares of Nu Skin Enterprises Inc. NUS -28.36% were halted four times Thursday after the anti-aging product company responded to pyramid-scheme allegations in China. Nu Skin shares were down 33% to $77.61 after the fourth halt was lifted…In a statement, Nu Skin said it will communicate and cooperate with Chinese regulators and conduct its own business review in China.