Why Herbalife and Nu Skin Shares Tumbled

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What: Shares of Herablife and Nu Skin Enterprises took a hit for the second time this week, falling 19% and 14%, respectively, after activist investor Bill Ackman continued to bash Herbalife and, by extension Nu Skin, which operates under a similar business model, in a presentation on his short position in Herbalife.

So what: Ackman gave investors a 342-slide, three-hour presentation yesterday on why he thinks the company is a pyramid scheme, saying that the company's distributors, or salespeople, make more money recruiting new distributors than selling the product. Ackman added that over Herbalife's 32-year history, 1.9 million salespeople have failed to sell the products, which cost them individually $2,000 in training and other costs. A company spokeswoman responded by calling the presentation a "malicious attack" and said it was based on "outdated, distorted, and inaccurate information."

Now what: Herbalife is planning an analyst day in January to respond to Ackman's claims. Over the past three days, the stock has lost more than a third of its value, so management clearly needs to reassure the market about its model. I didn't see Ackman's presentation, but considering the size and history of Herbalife, his remarks seem suspect. Other observers have pointed out that Ackman has been short the stock for a number of months but chose yesterday to make the presentation as he was believed to have a number of put options expiring today. I wouldn't be surprised to see these stocks bounce back after Herbalife's analyst day response.

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The article Why Herbalife and Nu Skin Shares Tumbled originally appeared on Fool.com.

Jeremy Bowman and The Motley Fool have no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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