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October 01, 2011

Canaccord Summary

October 2011 – Market Turmoil Continues

by Scott Van Winkle, CFA

Canaccord GenuityThe fundamental trends of sales and earnings for direct selling companies were not among investors’ top interests during August as broader economic concerns such as shaky European sovereign debt, political turmoil in the United States and an unprecedented downgrade of U.S. debt led the stock markets into a free fall, followed by a rally, followed by a free fall, followed by a … well, you get the picture. The outlook has become uncertain for stocks in the near term as the vicious circle of lost wealth in the stock market will undoubtedly impact consumer spending, and plummeting consumer confidence supports this outcome.

What has occurred, however, is that investors have begun to more aggressively seek out stocks where there is less economic sensitivity. As has historically been the case and validated by research from the Direct Selling Association a few years ago, direct selling generally outperforms the broader trends in GDP performance, including during times of economic weakness. Direct selling isn’t counter cyclical by any means, but there certainly are some offsets to consumer spending declines inherent in the business model given participants not only market products and services, but also part-time supplemental income opportunities. The historical performance of direct selling should lead to outperformance of the sector on Wall Street during trying times such as this summer. While many of the public companies didn’t see this outperformance this month, the fact is that the average direct selling company included in this monthly compendium fell less than the broader market did during August. The average stock fell roughly 1% vs. a 6% decline for the S&P500. If we focus in on just the larger pure-play direct selling stocks with market capitalizations over $100 million, the average fell just under 2% during the month. We won’t say that misery loves company, but it is at least good to outperform that company.

While the focus during the end of summer was on stock market volatility, there have been some positive developments among some of the publically traded companies to note. First, Blythe reported favorable growth during its second quarter on the heels of continued momentum at ViSalus that offset declines at Partylite. Investors rewarded the trends and favorable guidance for the remainder of the year with a solid share price rally that led to a new multi-year high in early September that recovered all of the August share price losses. The investor enthusiasm for the results was further aided by expectations that Blythe will acquire the remaining 42.5% of the company it does not currently own.

Nu Skin Enterprises enjoyed the most robust stock price performance during August among the larger cap stocks as investor expectations for its next stage of Age Loc product launches and the impact to sales momentum are rising rapidly. Another major corporate development was that China-based Tiens Biotech went private during August and trading was suspended.

While August wasn’t a good month and September hasn’t shown much improvement at the time of this writing, the good news is that the direct selling group as a whole is holding its own among the market turmoil. As investors see how calendar third quarter results trend, and if they reflect some economic resilience as history would indicate, the Wall Street view may improve.

Scott Van WinkleScott Van Winkle is a Managing Director of Equity Research at Canaccord Genuity, the global capital markets division of Canaccord Financial. Canaccord Genuity offers institutional and corporate clients idea-driven investment banking, research, sales and trading services from 16 offices worldwide. Van Winkle, based in Boston, has followed the direct selling channel since 1997.

Disclaimer: Canaccord Genuity has published research recommendations on Herbalife, Medifast, Nu Skin Enterprises and USANA Health Sciences and makes a market in shares of Herbalife, Medifast, Nu Skin Enterprises and USANA Health Sciences. Canaccord Genuity has provided non-investment banking securities-related services to Herbalife and Nu Skin Enterprises in the last 12 months. Past performance is not indicative of future results and these comments are not a recommendation to buy or sell the specific securities discussed.