Why Nu Skin Enterprises Shares Tumbled

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Nu Skin Enterprises were taking it on the chin today, falling as much as 19% and finishing down 16% after its business practices in China were attacked in the People's Daily newspaper.

So what: The official paper of the Chinese Communist Party accused the seller of skin-care products of being a "suspected illegal pyramid scheme." The charge hurts not just because those allegations have come up before against the multilevel-marketing company, but because different laws apply in China where direct sellers are under strict regulations. Despite the claims, Nu Skin carries "direct selling licenses" in 19 of China's 32 provinces and municipalities, and the company also issued its own rebuke. In a press release, Nu Skin said the article contains inaccuracies and exaggerations and that the reporters did not verify any of their information with Nu Skin. It added that it has been doing in business in China in full compliance for 11 years.

Now what: The pyramid-scheme attack is nothing new for companies like Nu Skin and peer Herbalife, and both have bounced back repeatedly from such charges. Still, in its most recent quarter Nu Skin derived about half of its revenue from greater China where it saw a whopping growth rate of 240% so these charges warrant investor attention. Among other claims, the People's Daily said Nu Skin brainwashes its trainees. Doing business in China always carries a level of shadiness whether it be investing in Chinese stocks or through American companies selling in China. The People's Daily story typifies this kind of risk, but it's unclear if the charges bare any actual teeth. I'd expect shares to bounce back, but investors should be aware that this is a riskier stock than most.