NEW YORK (TheStreet) -- The Federal Trade Commission is investigating the sales and trade practices of Herbalife (HLF), a multi-level marketing heath food and supplement supplier. As ugly as it may be, you had to see this one coming. Anyone taken by surprise Wednesday genuinely needs to reflect if Herbalife is a stock in which they want exposure.
Increasingly we will witness Herbalife become political. Once politics enters it's a crapshoot what will happen. Forget about right and wrong. Politics is about wielding power and influence that doesn't necessarily get it right. Take Tesla Motors (TSLA) as an example. The electric-powered automaker was shown the exit door by New Jersey because the company offers an innovative and customer-centric purchasing process.
Tesla didn't stand a chance. A state-sanctioned exclusion of Tesla was an easy layup for a well-organized and numerically superior dealership network fearful of losing their lucrative business model. Tesla and shareholders can anticipate the drama and results of New Jersey to play out in many more states to come. Is it right and just? No way, but it's reality and Tesla will need to find an alternative (and perhaps more expensive) solution.
The battle being waged in network marketing stocks is at a whole different level. The rewards and risks are eyeball popping, with billion-dollar bets being wagered in every direction. The average investor has no idea what's going to happen next until after it happens. Regardless if you're long or short, you may make the right call and still lose.
If you owned Herbalife early in 2012 or earlier, there's a fairly reasonable chance that if May's price crash didn't shake you out of your shares, December's did. Investors that exited to limit losses only to watch the company make new all-time highs were frustrated, but shorts who bought into Pershing Square Capital Management's Bill Ackman short thesis had their heads handed to them.
Pershing Square is risking enormous amounts of money that the wheels will fall off of Herbalife. Political contributions and lobbying expenses are a small cost of doing business if it hastens a regulatory unfriendly environment for Herbalife. On the other side of the coin is activist investor Carl Icahn with resources, influence, and financial wherewithal to go toe-to-toe with Bill Ackman.
Adding confusion and a wild card element are health-related mega-network marketing suppliers Nu Skin Enterprises (NUS) and Usana Health Sciences (USNA). These companies have the capacity to cause losses for Herbalife investors. Guilt by association could turn into Herbalife's greatest liability.