(B)(N) NUS Nu Skin Enterprises Incorporated

Drama. Nu Skin Enterprises is a multi-national direct selling company with sales of about $2 billion per year and a current market value of $5 billion. It seems likely that the company’s “selling model” was cast in the same shadow as that of Herbalife by the “dump & pump” crowd of short-selling hedge fund activists who really needed something to complain about – true or not, material or not, it didn’t matter as long as they could yell fire! in a crowded theatre with only a few exits. And they did (The Wall Street Journal August 18, 2013, How Ackman’s Herbalife bet inflamed Wall Street passions).

The Aging Myth by Dr. Joseph Chang
Courtesy: Nu Skin Enterprises

The stock price of Nu Skin dropped from $60 in early 2012 to languish at around $40 and lows as low as $30 early this year, but has since come roaring back with a gain of +200% – rejuvenated, so to speak – to the current $90. Please see Exhibit 1 below.

Now, some people will say “irrational exuberance” and others will say “animal spirits” and many people will say “What?” and decline to be investors.

But we say, that’s exactly how it works within the demonstrated societal norms of risk aversion and bargaining practice. (For more information, please see our Posts on The Price of Risk and The Nash Equilibrium & Its Stock Price, and most of these Posts illustrate some aspect of that.)

Whereas volatility is about small moves in the stock price as investors grapple daily and minutely with each other to agree on a price, so that some might buy and others might sell, according to their needs for cash or not, the stock price is more dramatically affected by larger visions of what really is, or what might be, and, if we buy and hold this stock, will it be as good as cash and better than money, say we, come what may. (Please see our Post Bystanders & Collateral Damage for more on this.)

That is, will it retain its value as cash; can we realize the cash when we need it; and is it better than cash because it’s an investment that is likely to provide income and a return that is better than the rate of inflation.

Selling large amounts of the stock short will tend (but not necessarily, as in the famous short-squeeze affecting the Porsche company in 2008 – The New York Times, October 30, 2008, Porsche reinvents the short squeeze) to drive the price down as long as there are buyers willing to buy it at a lower price; but that’s what the short-sellers want because it’s not their stock that they’re selling – it belongs to a bank, insurance company or mutual fund and all they have to do is replace it, later, by buying it back at a lower price.

Herbalife was in the direct line of fire and the investors became concerned enough for the safety of their money (fearing that the stock price might go to zero, subject to a ruling of the Court, if it came to that) to drive the price down and to sell at below the price of risk because of the money, reputation, and credibility of the short-sellers (please see our Post The Ackman Identity).

Nu Skin is now trading at way above the price of risk (Risk Price (SF) $50) signifying that the investors who buy and hold the stock at those prices believe that the company will earn those values, and that the “gap” between the stock price and price of risk will narrow as the price of risk increases rather than the stock price decreases, and the latter can only decrease if there are more sellers than buyers and the price of the stock will need to decline in order to be sold.

Despite the drama, Nu Skin has been eligible for inclusion in the Perpetual Bond™ since much lower prices of $10 in 2009 (Red line Stock Price (SP) above the Black line Risk Price (SF) and for no other reason) and, with our usual policies of price protection through stop/loss or collars, we’ve been there all the time, always willing to buy and hold a stock that is trading at or above the price of risk, and no other.

If we were buying it today, we’d also spend a few dollars to put a collar on it, or be prepared for a stop/loss sale at $85, or so, just because of ambient volatility or, possibly, some new surprise.

Our estimate of the downside due to volatility is minus ($12) per share so that the company could be trading between the current $90 (or so) and $80 to $100 without surprise.

To avoid surprise, we could buy the September put at $85 for $3.00 per share today, and sell (or short) an offsetting call at $95 for $0.95 per share so that for the cost of holding the stock at $86 (today’s price) and the collar at $2.05 per share ($3.00 less $0.95), we can keep the stock for between $85 and $95 no matter what and still collect our dividends of $0.30 per share per quarter for a current yield of 1.4%.

Obviously, things look a lot better, and we have many more opportunities, when we buy and hold the stock in the low range above the price of risk. We might also make a “killing” by buying stocks that trade below the price of risk, in the Contra Portfolio (N), but, in most cases, the death would be ours.

Exhibit 1: (B)(N) NUS Nu Skin Enterprises Incorporated – Risk Price Chart

(B)(N) NUS Nu Skin Enterprises Incorporated

Nu Skin Enterprises Incorporated is a direct selling company, which develops and distributes personal care products and nutritional supplements that are sold under the Nu Skin and Pharmanex brands.

(Please Click on the Chart to make it larger if required.)

From the Company: Nu Skin Enterprises Incorporated develops and distributes anti-aging personal care products and nutritional supplements under the Nu Skin and Pharmanex brands worldwide. It offers skin-care systems and treatment products, including ageLOC Galvanic Spa System, ageLOC Galvanic Body Spa, ageLOC Galvanic Spa Body Shaping Gel, ageLOC Dermatic Effects Body Contouring Lotion, and ageLOC Transformation anti-aging skin care system, as well as other cosmetic, personal, and hair care products. The company also provides LifePak, a line of micronutrient supplements that provide optimal levels of essential vitamins, minerals, and anti-oxidants; anti-aging nutritional supplements, such as ageLOC R2, which is designed to renew and recharge the body; and other anti-aging nutritional solutions and weight management products. Nu Skin Enterprises sells and distributes its products in North Asia, Greater China, the south Asia/Pacific, the Americas, and Europe, the Middle East, and Africa. As of December 31, 2012, it operated approximately 40 stores in China. The company was founded in 1984, has 4,000 employees, and is headquartered in Provo, Utah.

Postscript

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Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.