Transformation Capital: Large Cap Direct Selling Stocks Outperformed the Market in 2020

While December is commonly a quiet trading month, large cap direct sellers extended and consolidated their gains. The month of holiday breaks reflected a quiet period for the markets as a whole, but also signaled a slight upward performance of the Transformation Capital Direct Selling Index (TDSI), which rose 2.9%, as compared to gains of 3.3% for the Dow Jones Industrial Average (DJIA).

Prior to the pandemic, on February 28, the TDSI held at $45.74. Since then, the index has risen 77.1%, to $81. This is in comparison to a much slimmer 20.5% gain for the DJIA. The TDSI includes large cap, difficult to move stocks, that have risen 1,037% (TUP), 560% (EXPI), 145% (MED) and 128% (NUS). These stocks, plus three more, represent the seven stocks within the large cap tracking set that have more than doubled since February 28. This performance has been driven by significant company growth, as well as growth within the industry as well—both domestic and European markets. These markets, which saw rapid and steady growth in 2020, were believed to be in decline one year prior.

The large cap tracking set outperformed the markets as a group, with each stock posting gains, save two exceptions who posted small losses following huge November gains. Small cap tracking sets did not follow suit, showing relative weakness. All but two small cap stocks posted losses for December 2020, which provided an anchor effort on the overall performance of the index.

Standouts and Major Events

On January 3, Herbalife Nutrition (NYSE: HLF) reported that it would be repurchasing $600 million worth of its shares from its largest shareholder Carl Icahn, of Icahn Enterprises. As this dips below the threshold of stock ownership within their agreement, Icahn’s representatives will also relinquish their seats on the company’s Board. After initial uncertainty on January 4, the stock surged higher, following Icahn’s statement of continued belief in the company and observation of how the transaction will reduce shares outstanding by approximately 10%.

Standouts within the large cap tracking set include eXp World Holdings (NASDAQ: EXPI), which continued its remarkable performance by adding 18.4% to its gains and standing 560% above February levels.

Within the small cap tracking set, Natures Sunshine Products, Inc. (NASDAQ: NATR) was the lone standout with gains of 20% following a 19% increase in November. The stock has moved steadily higher since reporting strong financial results on November 9.

The TCAP Direct Selling Index

The TDSI is a market capitalization weighted index of all domestic public direct selling companies with a market capitalization of at least $25 million. The index is rebalanced monthly and no single issue is permitted to represent more than 20% of the total value of the index. In the event that a particular issue would exceed 20%, then the excess weighting is redistributed amongst the other index components.

The index delivered strong returns in December, surging 20% higher as compared to an 11.8% increase in the DJIA. Eleven of the 15 index components posted gains on the month, and seven advanced 15% or more. The index now stands 71% above February 28, 2020 levels, as compared to a gain of approximately 16.6% for the DJIA.

“During the month, the number of sell-side analysts maintaining ‘buy’ and ‘hold’ ratings on industry stocks increased slightly, while the number of analysts recommending investors ‘sell’ industry stocks continued to decline,” says Stuart Johnson, CEO of Transformation Capital. “As of the end of the year, approximately 95% of analysts covering industry companies had ‘buy’ or ‘hold’ ratings on those companies with nearly 60% being ‘buy’.”

Large Cap Stocks

  • Tupperware Brands Corporation (NYSE: TUP) declined slightly over the course of the month, a bullish sign following its impressive runup over the course of the last several months. TUP now stands 1,037% above its February closing price and has been the leading performer within the large cap tracking set. On December 3, the company announced the completion of its refinancing of senior notes, changing their due date to the fourth quarter of 2023. The stock surged nearly 9% higher on more than five times average trade following this announcement.
  • Nu Skin Enterprises, Inc. (NYSE: NUS) rose 6.1% and now stands 128.4% above its February 2020 closing price. The stock began December with a choppy pattern of trading, moving back and forth above and below its 50-day moving average, but appears to have found support beginning on December 21 and has generally trended higher since then.
  • Herbalife Nutrition, Inc (NYSE: HLF) traded in a pattern similar to NUS, with choppy patterned trading, but rose only 0.3% for the period. HLF traded 48.5% above its February closing price as of the end of December. With the announcement of Carl Icahn selling his controlling shares back to the company, shares outstanding will be reduced by more than 10%, delivering significant value to shareholders. Since the announcement, the stock has moved approximately 8% higher. Icahn retains approximately 8 million shares, or 6% of shares outstanding.
  • Medifast, Inc. (NYSE: MED) following an impressive 45.3% advance over the course of November, MED declined slightly in December (-3.3%) and now stands 145.5% above its February 2020 closing price.
  • USANA Health Sciences, Inc. (NYSE: USNA) rose slightly (2.6%). Its gain of 16.6% makes it the only member of the large cap tracking set that has underperformed the DOW (+20.5%) during the pandemic. USNA has consistently held above its 50-day moving average, indicating a relevant level of institutional support, but since setting its 52-week high in July, the stock has not done much of anything.
  • eXp World Holdings (NASDAQ: EXPI) rose an additional 18.4% in December and was the leading performer in the large cap tracking set. EXPI has been the second leading performer in the tracking set and during the pandemic period with gains of more than 560% since February 28.
  • Primerica, Inc. (NYSE: PRI) rose slightly (2.8%) following a strong November during which it advanced 18.5%. PRI virtually matched the DOW’s performance in December.

Small Cap Stocks

The group as a whole showed some weakness in the period with six of the eight stocks within the tracking set declining during December. One notable exception was Natures Sunshine Products, Inc. (NASDAQ: NATR), which rose an additional 20% after posting 19% gains in November. The stock has traded consistently higher since the company’s announcement of financial results in early November and now stands 82.3% above its pre-pandemic levels. Taking a wider view, every stock within the small cap tracking set, with the exception of LFVN has posted gains during the pandemic period and all but two have outperformed the DOW.

Short Interest Data Analysis and Forecasts

As indicated by the TCAP “days to cover” chart, short interest has generally declined across the industry since the markets reached their mid-March COVID-19 induced lows. The last month saw a slight increase, which TCAP attributes to both lower trading volume as well as many industry stocks trading at or near 52-week highs in recent weeks. Overall, the TCAP Direct Selling Short Interest Index stands at 3.4 days to cover, up for 2.6 days as of November’s report.

Short interest is not always a clear indicator. Increase in short interest can be a bearish sign of increased sentiment among investors that a stock is likely to decline. Conversely, as a stock moves higher, a significant short interest can serve as extra fuel on the fire as investors scramble to “buy to cover” their short positions and mitigate losses.

Forecasts and Expectations

TCAP forecasts the first half of 2021 will continue the same trends seen over the last several months, including continued year-over-year growth within the domestic market. However, the Georgia Senate races, with its democratic victory in both elections, will likely result in significant selling within the equity markets. TCAP also predicts that a democratic victory would heighten the regulatory risk faced by the industry as a whole.

While the election results are significant, they are not expected to have any immediate or short-term impacts on business operations within the industry. “Have we reached an inflection point that will carry the industry over the next several years?” Johnson asks. “Our hope is definitely ‘yes’.”