Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Herbalife when Get Rich Quick is an Investment

Herbalife (NYSE: HLF) might just be the most unethical publicly traded company in America. It also has some of the strangest share price activity around.

The supplement-sales organization agreed to pay a $200 million fine and change its business practices on July 15, 2016, The Los Angeles Times reported. The action was designed to settle charges by the Federal Trade Commission (FTC) that Herbalife is basically a get-rich quick scam.

The FTC does not go as far as Hedge Fund bad boy William “Wild Bill” Ackman who has been alleging that Herbalife is nothing but a pyramid scam for years. Instead the commission charged that the company’s compensation system was unfair because distributors were paid more when they recruited new distributors.

Herbalife has to change to a new system in which two thirds of a distributors’ compensation is based on tracked and verified retail sales. The FTC is also requiring that 80% of sales must be made to legitimate customers not to other distributors. Herbalife will also have to stop claiming that its distributors can get rich and quit their day jobs.

It is not clear how the settlement will affect Herbalife because the agreement only affects the company’s operations in the United States. Around 80% of Herbalife’s revenues come from sales outside the US, The LA Times reported.


Is Ackman Right about Herbalife?

The FTC did reveal a few numbers that seem to verify Ackman’s charges against the organization. Those charges include:

  • 57% of Herbalife Nutrition Club operators reported making no money or losing money.


  • The average club operator spent $8,500 to open the business.


  • The average Herbalife Distributor; or sales leader, in the United States made just $300 in 2014.

With numbers like that it sounds as if Herbalife’s US business is effectively dead. If it cannot recruit new members, Herbalife will not be able to stay in business. Yet one wonders how the organization will sign up new members without the get-rich quick spiel.

One person who still believes in Herbalife is billionaire Carl Icahn who said he plans to increase his holdings of its stock. Icahn owns around 18.3% of Herbalife’s stock, but he has the right own as much as 35% of the stock if he wants, The Los Angeles Times reported.

Is Herbalife a Good Investment?

Okay so Herbalife is sleazy, unethical and possibly a scam but is it a good investment? The answer is definitely no, because investors were rewarded with a return of equity of -289.1% on March 31, 2016, ycharts estimated.

If that number is correct, Herbalife shareholders lost $2.89 of dollar that they invested. In contrast Avon Products (NYSE: AVP) reported a return on equity of 217.2% on March 31, 2016.

What’s even stranger is Herbalife’s stock price, on July 15, 2016; Avon was trading at $4 a share, while Herbalife was selling for $65.25 a share. That price actually increased by $5.89 or 9.99% on July 15, despite the FTC’s action.

That got me to ask the all-important question is Herbalife making money? The answer interestingly enough is yes. On March 31, 2016, Herbalife reported the following financial numbers:

  • $4.483 billion in revenues.
Tele 2 Arena Sthlm. Fotboll Superettan Hammarby-Ljungskile 0-1 Hammarbys startelva
Tele 2 Arena Sthlm. Fotboll Superettan
Hammarby-Ljungskile 0-1
Hammarbys startelva
  • A diluted earnings per share figure of 4.164.


  • A net income of $356.7 million.


  • A profit margin of 8.56%


  • A free cash flow of $111.4 million

maxresdefault (1)

  • $608.7 million in cash from operations.


  • $774.2 million in cash and short-term investments.


So yes Herbalife does make some money which puts it in a better position than Avon. Avon reported a negative net income of -$1.168 billion, a negative free cash flow of -$215 million and a negative profit margin of 12.7% on March 31, 2016. Avon made just $77.6 million in cash from operations but it did report $755.4 million in cash and short-term investments.

This means that Herbalife’s business model is profitable despite its questionable ethics and sales practices. Investors like Icahn might actually make some money from it; if Herbalife can make up for the US business it’ll lose if it has to clean up its act.

Avon and Herbalife are Slowly Dying

It also looks as if Avon’s business is dying but Herbalife’s at least has something of a future. Herbalife’s revenue fell slightly over the last year dropping from $4.801 billion in March 2015 to $4.483 billion in March 2016. Avon’s collapsed in the same period dropping from $7.016 billion in March 2015 to $5.673 billion march 2016, a loss of $1.343 billion in just a year.

These figures indicate that direct sales of supplements and makeup are slowly collapsing largely because of competition from aggressive discounters like Amazon (NASDAQ: AMZN), Walmart Stores Inc. (NYSE: WMT), Kroger (NYSE: KR) and Walgreen Boots Alliance (NASDAQ: WBA). Those sell comparable products at a much lower price and don’t require membership commitments to buy.

This makes both Herbalife and Avon lousy investments. Neither company seems to have much of a future in a drastically changing retail environment. My advice would be to stay far away from both companies, and to definitely avoid Herbalife. It’s a lousy company with terrible ethics and very questionable business model that will probably collapse in the near future.

My take is nobody but Carl Icahn will make any money off of Herbalife. I also predict that the battles over Herbalife will continue for the foreseeable future. This company and stock are far from dead, even if they are a terrible investment.