Transformation Capital: Small Cap Direct Selling Stocks Outperform the Dow Jones Industrial Average

The past year has delivered unforeseen and unprecedented growth for direct selling stocks. With the majority of large cap stocks reporting their full-year financial results this month, there was significant volatility within the direct selling stocks segment.

In spite of this instability, large cap stocks posted gains for the month of February. The Transformation Capital Direct Selling Index (TDSI) rose 3.1% during the month, compared to a 3.2% gain for the Dow Jones Industrial Average (DJIA). The TDSI now stands 88.6% above February 28, 2020 levels. Within the same period, the DJIA gained approximately 21.7%.

Small Cap Stocks:

Every stock within the small cap tracking set (with the exception of LFVN) posted gains and outperformed the DJIA during the pandemic period. The most notable small cap stock within the tracking set was Medical Marijuana, Inc. (OTC: MJNA), which posted gains of 178% after a strong January. The company also benefited from its ability to generate interest from investors in the midst of positive regulatory trends around cannabis. Also noteworthy among small cap stocks was Natural Healthtrends Corp. (NASDAQ: NHTC), which set a 52-week high early in February before settling into a consolidating pattern for the rest of the month.

“We can say, with certainty, that no one could have predicted the remarkable run direct selling stocks have had over the last twelve months,” said Stuart Johnson, CEO of Transformation Capital. “We can also say that no one could have predicted that the domestic US market would lead the way to significant revenue growth over the course of 2020.”

Large Cap Stocks:

  • Tupperware Brands Corporation (NYSE: TUP) increased slightly (1.6%) in February after setting a new 52-week high in January ($38.59). The stock has traded in a slightly downward consolidating pattern since then. The company’s full year financial results significantly missed analysts’ earning expectations which resulted in an approximately 20% decline in stock value. In spite of this, the stock is still up dramatically the last 12 months.
  • Nu Skin Enterprises, Inc. (NYSE: NUS) remains up more than 115% over the last year, but declined approximately 11% in February. The company reported a 28% increase in revenue for the fourth quarter of 2020 over the same period of 2019.
  • Herbalife Nutrition, Inc. (NYSE: HLF) traded down approximately 12% for the month. Strong fourth quarter revenue growth of 15.6% was still beneath analyst expectations and resulted in its stocks trading significantly downward. Both NUS and HLF are experiencing the consequences of consistent success and the difficulty of beating increasing analyst expectations.
  • Medifast, Inc. (NYSE: MED) rose 7.8% during February and now stands 216% above levels from the same time one year ago. The company’s fourth quarter results beat analyst expectations and included revenue that was up 55.3% year-over-year.
  • USANA Health Sciences, Inc. (NYSE: USNA) stock reached a new 52-week high of $101.50 following the announcement of its fourth quarter revenue results, which increased 14.5% year-over-year. Both the EPS and revenue beat analyst expectations by far.
  • eXp World Holdings (NASDAQ: EXP) rose an additional 13.3% and ended the month up 1,163.4% over the course of the last year. The company’s fourth quarter results included both record revenue (an increase of 122% year-over-year) and profitability, but the stock sank over the next several sessions.
  • Primerica, Inc. (NYSE: PRI) rose 1.7% over the course of the month. It hit a new 52-week high of $149.05 in early February. Its fourth quarter financial results met expectations and included revenue of 12.5% year-over-year.

Short Interest Data & Analysis

Short interest has generally declined across the industry as the markets reached their mid-March and COVID-19 induced lows. Industry-wide days to cover fell to 2.4, the lowest level since a recorded 1.5 in August of 2020.

  • USNA fell to 6.9 days to cover, the stock’s lowest levels since July of 2020
  • PRI fell to 1.5 days to cover, its lowest level since the TDSI began tracking in March of 2020
  • EXPI short interest dropped to 0.7—its lowest levels since the TDSI began tracking data

The number of sell-side analysts maintaining “buy” and “hold” ratings on industry stocks remained flat at 97%, but the number of analysts recommending “hold” as opposed to “buy” increased slightly. The number of analysts recommending “sell” remained sparse.

“Looking forward into the remainder of 2021, we see continued strength across the industry, and, from a financial results and stock performance perspective, particularly in the first quarter,” Johnson said. “We believe business will remain strong through the year. However, as we move into the second quarter and beyond, the year-over-year comparables will become more and more difficult to replicate and exceed.”