Tuesday’s market had an unusual and interesting event. In addition to the unsurprising crash and burn of flailing JC Penney (JCP), another high-profile and controversial stock was all talking heads could discuss in the morning. That stock was Herbalife (HLF), which has been trading towards the lower end of its 52-week range lately amidst controversy about the company’s business model and growth potential.
Bulls point to HLF’s traction with Hispanics, strong customer loyalty, and word-to-mouth marketing focus. With Hispanics being the top-growing demographic in the United States and HLF customers often maintaining a fanatic devotion to the company’s products, there’s a lot to like. Bears, on the other hand, claim that Herbalife is really nothing more than multilevel marketing, and most of the company’s customers try to make a living from the company and fail to do so. Like any pyramid scheme, that perceived fanaticism may be little more than a desperate sales pitch from customer/salespeople earning less than minimum wage.
The result has been extreme volatility, which makes it a great stock for short-term high-risk swing trading, and this morning seemed like a tremendous swing trade opportunity. Trading of the stock was halted for two hours on pending news. Meanwhile, investors pondered what this could mean, but halting is rarely good, and for a name like HLF, it’s almost definitely bad. So with baited breath, investors waited.
Then the news came out. Accounting firm KPMG was resigning as the company’s auditor as Federal prosecutors investigate possible insider trading resulting from a senior partner leaking information to a trader. KPMG was also announcing that another leak from the same source was causing them to resign as auditor to Sketchers (SKX). This appeared to be an isolated case more to do with fraud in KPMG than anything to do with HLF per se.
These insider trading investigations happen all the time. Rogue accountants at the Big Four accounting firms frequently take advantage of their unique position to make a quick and illegal buck, so it has nothing to do with Herbalife and shouldn’t really impact the stock in any way. Indeed, on the news SKX went up over 1% in intraday trading on the news as investors breathed a sigh of relief that there is no immediate threat to the company.
Herbalife, on the other hand, fell by nearly the same amount. But why? The news for both companies was virtually the same. But HLF is a much more controversial name than SKX, whose biggest risk is the capricious tastes of America’s youth. So what is a source of relief for Skechers investors is becoming a source of concern for Herbalife investors, again demonstrating that the stock remains controversial and volatile.