I want to start off this post “Investing Mistakes I wished I knew” with vulnerability. I have been investing for more than 5 years and I still make mistakes when it comes to investing. For those of you who are angry at yourself for losing money in the stock market, I want to assure you that you are not alone. Even the Founder of Value Investing, Warren Buffett makes mistakes. (Read More: Buffett Investing Mistakes).
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This article is not a buy/sell recommendation of the company.
Thoughts before investing
I first stumbled on this company when one of my friend told me about USANA. USANA is a direct selling company based in USA selling health supplements and nutrition products. I began to look at USANA in April this year as someone told me USANA share price has been dropped to a 52 weeks low. Looking at the charts, it is easily a 40% drop in USANA stock price.
That aroused my curiosity and I began to look at the financials of the company. (USANA Key Ratio). Financially, USANA has a fantastic balance sheet of USD$554 million with no long term debt. I like companies with excellent balance sheet as it means the company have the backing to withstand economic crisis. Technically, a company cannot go bankrupt if there are no debts.
I also look at the operating income growth of the company. Over the last 5 years, the company has been growing at around 10%. I feel the 10% is a reasonable growth rate for a company like USANA. Generally, I like a company who is able to grow at a sustainable rate.
There is probably not much capital expenditure for USANA, so I also like operating cashflow growth rate.
Using a simple DCF calculation, I believe the intrinsic value of the company to be around $82. (I will not be going into the details of my DCF calculations. I’m using a 10.5% discount rate for the DCF calculation).
I thought I had a good bargain and so, I bought 100 shares of USANA.
Upon holding onto the stocks
“When I invest into the company, the stock price will drop!”
I hear this very often in seasoned investors. This is also what happened to me after buying USANA. After buying it at $82, the stock price went to $75. What luck. However, I wasn’t very concern about the price as I believed it was an overreaction from the public.
End Quarter 1
The Chinese Government have been clamping down on Direct Selling Companies in a 100 Day operation to clean up the health food market (Read More: 100 Day Operation). It began in January 8, 2019. I have already expected that the USANA first quarter results to be affected because of this reason. Looking at the results below, net sales decreased from $157 million to $144 million. It represents around a 8% drop in sales. They will a lot to catch up in the following quarters.
We can see 50% of USANA revenue is made up by the Chinese market. I recognized that as a market concentration risk. I believed that this quarter result was an one-off due to the 100 days operation.
However, I felt disturbed after reading the statement made by CEO, Kevin Guest.
I was concern that 2019 operating plan contained very little promotional activity in the first quarter. It might be a strategy as the 100 days review was on-going. However, this suggest to me they are mainly focusing on the Chinese market and there was little plans to have promotions in the other markets. I find this worrying as the market concentration risk was bigger than I thought.
End Quarter 2
I expect sales to pick up during second quarter for 2 reasons. The first reason is the 100 days review was already over and the second reason is that promotion activities would have picked up. It would be an “easy win” for USANA in the second quarter. I couldn’t been more wrong.
Net sales dropped in the 2nd quarter. It turns out it did even worse than the first quarter.
We can also see that the absolute number of active customers in their top 2 markets (Greater China and American/Europe) dropped significantly.
From what I gathered from Kevin, their “usual promotion and incentive” techniques did not deliver. Kevin was focusing a lot of promotional activities and when it did not work, I can’t help to feel that the management probably didn’t not understand the Chinese market well. That’s might be one reason why the promotion and incentive did not work. At this point, the stock price already reacted and went down to $58 at a point (representing a 30% paper lost on my investment). I cannot foresee what USANA can do to further increase sales.
USANA also decided reduce their EPS guidance in the next quarter. In an attempt to give beat estimate in the 3rd quarter, I believe they will repurchase shares during the third quarter as well to boost their EPS.
After following the company closely for 2 quarters, I was most concerned about the lack of passion in Kevin’s statement. It felt like he was just doing BAU (business as usual).
End Quarter 3
With reduced EPS guidance and also a chance to repurchase shares, the market reacted positively to the results.
To me, this smells like bull shit. When we buy back shares of the company, there is less shares base and so this might increase the EPS as compared to the previous quarter or year. They have also lowered their revenue estimates, “beating” this quarter revenue might be a way to give themselves an “easy win”.
Let’s look into the actual numbers and what Kevin has to say about this quarter.
In summary, Kevin feels that it is a successful quarter because there is modest growth in net sales and active customers, customers are responding positively to the promotion and Chinese market seemed to be doing well this quarter. Let’s look at the numbers.
In this quarter, USANA did have an increase in net sales. The Chinese market gave a 1.5% growth as compared to the last quarter. In Kevin’s words, it is really a “modest” growth. The marketing and promotion i(f any) gave a small growth. With 3 quarters down, we can expect that USANA will not grow as compared to the last year.
To interpret this, we add the number of preferred customer and also the active associates. Total number of Chinese preferred customer fall quarter on quarter from 278,000 to 273,000. I do not see how the chinese market is excited about USANA market as what Kevin as said.
I fail to see how USANA is doing well or have the potential to do well in future. As the stock price has rallied till $80, I exited my position getting a 2% realised lost for investing in this company.
What I learn from investing in USANA
1) Management’s Passion
We are on a subjective topic over here so all opinions are mine and mine only. It pains me to read every quarterly earning calls transcript when the CEO lacks passion in what he does. There was simply no life in his words. I suggest that for you to read or listen to earning calls as it gives a indication how passionate the CEO, CFO is to the company. I wished I had read prior earning calls transcript before investing into USANA.
Looking at the insider shares being traded, we can see that clearly there is more shares being sold. There could be many reasons why someone will sell the stocks. However, we can also interpret it as how “valued” the company is to the insiders. I find it hard to convince myself that the management have a skin in the game together with us.
2) Blinded by the numbers
I fell in love with the great track record that they have and did not ask myself whether USANA has a competitive advantage. We also call this a moat. In some cases when the standard moats are absent, I ask myself whether this company can solve a pain point of the existing market. I felt that USANA might have a weak moat of branding (if any at all).
Looking back, I felt that I did not ask myself this question before buying into the company. I was blinded by the great track record and failed at that.
3) Check the numbers. Not just what the new report says
In quarter 3, the reports shows that USANA beats EPS and revenue estimates. Digging into the numbers, we can see that the guidance was lowered and it might be easier for those estimates to be hit. Secondly, there was a share buy back during that period, that could help beat the EPS. Despite what the headlines says, it isn’t a rosy year for USANA .
This sums up my learning over the past 1 year. These are some of the mistakes that I wished I knew earlier and I hope that it can benefit someone out there learning how to invest.
All opinions above are my own. Please view our disclaimer page to understand more.
Now that you’ve read about learnt about how to benefit from Investing Mistakes I wished I knew. I challenge you to read this article (Things To Consider Before Investing In Foreign Dividend Stocks )to push your understanding further!