Greenberg: New Year Report -- Herbalife and More
By: Herb Greenberg
| 01/02/14 - 02:58 PM EST
SAN DIEGO (TheStreet
) -- With the new year under way, let's get started with a look ahead and an audit of stocks on my Watch List.
When you primarily fly red flags in an almost straight-up market -- which confuses brains in a bull
market -- you just keep plowing ahead. I've been there, done that and doing it again.
As longtime readers know, I don't make stock calls. I point out risk. And I don't view a story
as having been proven right or wrong just
because a stock rises or falls yesterday, today or even last year. (For that reason, I think it's an absurd measurement to judge investment managers on performance in a single 12-month period, but I digress.) Many of these stories can take time -- sometimes a long
time -- to play out. They're not calls on the stock, but on risk that can get in the way of a stock. Rising stocks, especially in indiscriminate bull markets, can paper over any number of risks -- until they don't.
Investors in Ulta Salon
, for example, got a wake-up call earlier in December when its shares lost a quarter of their value in a single day on bad earnings news. Even so, I would argue, the risk of further disappointment continues.
Ulta has long been and continues as a company worthy of red flags -- and remains high on my Stock Watch list.
Among others on the list -- and a few updates:
What more can be said? Either Herbalife
will do the mother of all buybacks, go private, do some kind of a recapitalization or ... nothing.
Whatever it does, this one will go down as one for the books.
Going private will make the controversy moot for public holders (but not investors in the deal). A big buyback won't.
After 10 months of reporting for my CNBC
documentary Selling the American Dream
, I do know this: The multi-level marketing industry, Herbalife included, operates in what appears to be an undefined, gray, ambiguous area of FTC guidance that has escaped serious scrutiny.
From Herbalife's 10-K: "The regulatory requirements concerning network marketing programs do not include bright line rules and are inherently fact-based."
I also know this: The circus atmosphere surrounding the skyrocketing stock has nothing to do with, nor resolves, a number of serious questions. It serves more as a distraction and as long as the company remains public, or
gets a clean bill of health from regulators, the risk remains.
One analyst notes, in a report Thursday, that because of the scrutiny, the company has been forced to improve policies, but that gets to the questions: Why? And have the changes removed, beyond any doubt, concerns about Herbalife's underlying model? I'll pack up and go away on this one after regulators and/or courts weigh in -- if they ever do.
Until then, from my perspective, the reality: The only thing that has changed is that Herbalife's stock has gone straight up, thanks largely to investors playing the momentum and coat-tailing a few well-known, smart investors.
The stock's rise does nothing to validate the company's business model; it merely validates that, for whatever reason, more people have wanted to buy Herbalife's stock than sell it. The whole situation has devolved to this level: Last week an analyst from Wedbush raised his target on the stock, in part, after discussions with Herbalife distributors suggested the company's weight-loss shakes haven't been impacted by Nu Skin's new weight-loss systems.
I say "devolved" because I believe it's ridiculous to (a) take the word of a company's distributors and (b) view products from multi-level marketers as competing like products that sit next to each other on grocery shelves.
P.S.: If you ever really want to get to the heart of this story, and how lobbying and political pressure has helped give the industry a free pass, go back and do a thorough scrub of the multi-year history of the Business Opportunity Rule. Don't forget to read the originally proposed and final versions of the rule. This part of the story always seems to fall through the cracks.
Investors are ignoring low-quality earnings and a slide in the K-Cup market in hopes that, under new management, Green Mountain
can experience the second coming of a new generation of K-Cups that it hopes consumers will embrace.
Maybe they will, maybe they won't. The stock very well may trade up over the next 12 months on the hype and hope of new products. On the other hand, with non-licensed single-serve cups stealing share, maybe it won't.
Reality: It already tumbled once from $100 to $20; no rule that says it can't happen again if all does not go according to plan.
Any way you slice it, this is a play on the gluten-free fad. Boulder Brands
says it's not a fad. I say it is -- and that it's an unsustainable fad in an increasingly crowded space of food companies doing what food companies always do: Cashing in on fads.
The stock is about where it was when I first wrote about it
in September. But I continue to fly red flags because except for those who suffer from celiac disease (a small percent of the population that must eat uncontaminated gluten free food) sticking with a purely gluten free diet is as hard as, say, being a vegetarian. Did I say it's a fad?
Reality: The risk, for investors, as Boulder Brands expands its product line and shelf space, is that once it gets its products in all of the stores that want it, the growth ebbs (short of hinging its fortunes on some new fad or the company getting acquired). Last week the company acquired a small maker of frozen foods. The deal gives it more shelf space but it came at a price: Around 30-times 2014 expected Ebitda. (That's a tad high.)
Rarely do you see a company whose strategy has misfired as Clean Harbors'
has. Yet most analysts love it.
Clean Harbors, as I originally wrote
, is a business whose growth traditionally tracked GDP, and whose stock
rode the wave of oil spills. And many analysts who follow it are holdovers from the legacy waste days, which means they know the waste business, but not necessarily the nuances of oilfields -- which, Credit Suisse analyst Hamzah Mazari says, has made the company considerably more cyclical. It's also made it more volatile and commoditized. Oh, and more competitive.
Yet it still trades more like its former self, with a P/E of around 20 vs. the refiners, which hover closer to 6 to 8-times earnings.
Reality for investors: Beware if that spread narrows.
has lost about a quarter of its value since my CNBC
documentary, The da Vinci Debate
, first aired in June 2013. The crux of the story: Intuitive had overmarketed its robot to too many hospitals and doctors.
Since then the company's sales have been sliced as hospitals have held back on system purchases in the wake of a growing controversy over the da Vinci's safety.
Reality -- the risk, going forward: That sales continue to slow, especially if the company revises its marketing practices. The next quarterly report, on the heels of two rough ones, will be critical.
doesn't ring a bell, that's because you don't live in Latin America, where it's known as the eBay
of such countries as Venezuela, Argentina and Brazil."
So started my piece last September, Warning Bells at MercadoLibre
It chronicled the long-running controversy stirred by the research firm, Off Wall Street, over the way MercadoLibre accounts for currency translation in countries where currencies are collapsing against the U.S. dollar as inflation shoots through the roof.
My added twist: CEO Marcos Galperin had a history of well-timed sales -- and he had just sold a slug of shares.
This time, yet again, he proved prescient. MercadoLibre's stock has since tumbled nearly 20% as currency and other issues have sparked worries on Wall Street.
Reality -- the risk continues: Even after the stock's slide, Goldman Sachs recently initiated with a sell, and Morgan Stanley downgraded to a sell, saying, "the risk-reward looks poor, despite the recent pullback."
Yet another company most people have never heard of, but even if you don't know the company, you know what NeuStar
does: It runs the database that makes it possible for you take your phone number with you if you move or change carriers.
As I wrote in October, in a piece headlined, Why NeuStar Could Fall
, the contract for the database is up for grabs for the first time since NeuStar started managing the database in 1997.
The concern for investors: Anything short of a contract that is exclusive and status quo could ultimately hit NeuStar's software-like margins.
Reality: Unless a decision or recommendation by regulators is pushed off yet again, as it was several months ago, the final word on the contract is expected within weeks.
CEO Paul Ricci wasn't No. 2 on my Worst CEO's of 2013
list for no reason: Nuance's shares have been among the worst performers for the past one and three years, and no surprise: Its performance has been dreadful.
Nuance, best known for its voice-recognition technology, is one of the longest-running rollups going. The big issue has always been: What happens when the takeovers slow or stop?
They're slowing -- not only top-line growth, but more critically, so is growth of companies that have been part of Nuance for more than a year or two.
Reality: Short of activist Carl Icahn doing something to either dismantle the company or somehow jump-start investor returns, the risks remain.
Other companies worth watching: Rackspace
(caught in the middle of too much competition in the commoditized area of managed hosting); Caterpillar
(beware of future charges related to its acquisition and subsequent near-dismantling of Bucyrus); Potbelly
(priced for perfection) and World Acceptance
(small loan-consumer lending whose 204% interest rates caught my eye last year. Its stock defies logic.)
Reality: It's setting up to be quite a year.
-- Written by Herb Greenberg in San Diego
You can contact me at: email@example.com