Tickers in this Article: USNA, HLF, NUS, AVP, BRK.A
Market strategist Barry Ritholtz describes the five hats of great investors: historian, psychiatrist, trial lawyer, mathematician and accountant. Whether you make a living investing or not, you'll want to heed his wise words. Using his theory, let's examine Usana Health Sciences (NYSE:USNA), a manufacturer of vitamin and mineral supplements that recently saw its stock drop 12.5% in one day of trading due to the resignation of its COO, CFO and executive vice president of sales. Usana's reputation is tarnished for sure, but that doesn't mean its stock is without merit. TUTORIAL: The Value Investor's Handbook

Understanding the past helps you see the possibilities, both good and bad. Usana, since the resignations, has traded under $30 for the first time April 2010. In the past 60 months, it has traded below $30 in 21 of them, or approximately 35% of the time. It has traded below $25 in 12 of 60 of those months, and below $20 on just five occasions. The likelihood of it falling below $20, therefore, is slim indeed, which gives us a floor price of sorts. (For more, see 4 Factors That Shape Market Trends.)

Fear and greed are the two biggest emotions that bring down investors. Applying this credo to Usana, one might assume the stock dropped due to investor worries of a hypothetical infraction by the company related to their controversial but legal marketing plan. Or investors might have feared a rudderless company. Whatever caused investors to sell, the trading volume on May 10 was 10-times the daily average. Thankfully, there are two sides to every trade. For each person fearing the unknown, there was someone relishing it. If you haven't already pulled the trigger and sold, you might want to wait a little while longer until the truth about the departures make its way into the news. Often, we never realize our worst fears. (For more, see Traders: Profit From Other Investors' Fear.)

Trial Lawyer
You shouldn't believe everything you hear or read, nor should you casually dismiss it. Skepticism is a healthy characteristic, to a degree. But when skepticism turns to fear it can be absolutely debilitating. The biggest fear some have with Usana seems to be its multi-level-marketing business model that has sales people recruiting other sales people in addition to selling product. Google the words "Usana Scam" and you get over 29,000 results. Do the same for Herbalife (NYSE:HLF), NuSkin (NYSE:NUS) and Avon (NYSE:AVP), and the results are similar. This skepticism and fear isn't new. That doesn't mean it's rational. Berkshire Hathaway (NYSE:BRK.A) paid $900 million for the Pampered Chef in 2002. It too is an MLM, and Warren Buffett doesn't seem to have a problem. In fact, many large consumer product companies use network marketing for some portion of their business development. The real question is why three top-level executives all walked at the same time. The most logical explanation is the Wentz family, who own 54% of the company, didn't agree with the trio's plan of action, or vice-versa. (For more, see What Is A Pyramid Scheme?)

Warren Buffett does most (if not all) of his mathematical calculations in his head. You don't need to be that good but basic math helps. For instance, Usana's enterprise value is 5.3-times its earnings before interest, taxes, depreciation and amortization. You get this dividing $430.2 million (EV) by $81.2 million (EBITDA). Compare Usana's with its peers and you'll see that it's much lower suggesting a potential value play. You also don't need to know how to calculate Usana's discounted present value of its future cash flow. That's for CFAs who are paid to crunch numbers. Instead, take an extended period, say five years, and calculate the cumulative growth in revenues and earnings. Between 2005 and 2010, Usana's revenues and earnings grew 57.9% and 17.2% respectively. This tells you that although its business went in the right direction the past five years, it wasn't nearly enough for growth investors. (For more, see Revenue Projections Show Profit Potential.)

All you really need to understand is how a company makes money and the likelihood of these earnings continuing to grow. Usana makes money selling its nutritional and skin care products to 228,000 active associates, who both resell to its network of 77,000 preferred customers worldwide as well as purchasing the products for themselves. As long as both numbers continue to grow, chances are good so too will revenues and earnings. In 2010, its Asian revenues surpassed North American revenues for the first time in its history with Greater China (Hong Kong, Taiwan, China) accounting for 30% of the overall revenues. In August last year, it acquired BabyCare Ltd. for $62.7 million. Although the Beijing direct-seller had sales of just $15 million in 2009, it gets the company into mainland China. That's critical to its future growth and although there are risks associated with doing business in China, the rewards outweigh them. (This emerging market is making strides in regulation and disclosure. For more, see Investing In China.)

Bottom Line
The five hats leave some unanswered questions. However, history tells me that those investors able to keep their emotions in check should play the Usana discount. (For more, see Value Traps: Bargain Hunters Beware!)

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