Another day, another interesting situation that has crossed my radar thanks to my homegrown double-net value searches, a favorite screening tool. This one has some potential flees, but that can be par for the course for companies that trade at such a low multiple of net current asset value (between 1 and 2 for this screen). The important takeaway here is to look beyond the numbers before you take the plunge.
Same as the subject as Wednesday's column, Natural Health Trends (NHTC) is another newer name to me. The direct seller of personal care products has seen its shares slide more than 50% since last August, with much of that damage occurring on January 7th on the back of allegations made on a China Central Television broadcast that the company is "operating illegally" in China in a pyramid scheme. Shares have fallen an additional 12% since then.
That falling stock price has translated into a company that now trades a 1.83x net current asset value, and less than 5x trailing earnings. There is currently no analyst coverage, which in my view is a negative in this case. The company is based in Hong Kong, operates in several countries, and frankly I've tended to avoid non-U.S. based double nets over the years.
So it is with a somewhat skeptical eye that I view this name at this point anyway. It is difficult not to notice the balance sheet, which boasts $132.6 million, or more than $11.70 per share in cash, and no debt, especially considering the fact that shares closed Thursday at $12.99. In addition, NHTC currently pays a 16 cent quarterly dividend, which equates to a 5% dividend yield. On paper, this is all very compelling.
The headline news has not been kind to NHTC, and there are multiple class action lawsuits that have been announced on behalf of shareholders. In addition, as of the end of February, there were more than 2.5 million shares sold short, a considerable amount for a company with 11.3 million shares outstanding.
Adding intrigue to the story, January's incident was not the first time that the "pyramid scheme" allegations have surfaced.
I don't have the stomach for this one at this point. It is conceivable that some positive news or a short squeeze could lift shares but there are too many unknowns. If I were to blindly follow the numbers, a company with $11.70 per share in cash trading around $13, yielding 5%, it might be a no brainer, but the backstory tempers the enthusiasm.
How Much Money Will I Need to Retire?
Want to learn about retirement planning from some of the nation's top experts? Join TheStreet's Robert "Mr. Retirement" Powell live in New York on April 6 for our Retirement Strategies Symposium. For a limited time, tickets are available for $99 for this full-day event. Check out the agenda, learn about the speakers and sign up here.