Nu Skin’s stock price has taken a beating over the past six months, shedding 41.8% of its value and falling to $7.59 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in Nu Skin, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Even with the cheaper entry price, we don't have much confidence in Nu Skin. Here are three reasons why we avoid NUS and a stock we'd rather own.

Why Do We Think Nu Skin Will Underperform?

With person-to-person marketing and sales rather than selling through retail stores, Nu Skin (NYSE:NUS) is a personal care and dietary supplements company that engages in direct selling.

1. Revenue Spiraling Downwards

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Nu Skin struggled to consistently generate demand over the last three years as its sales dropped at a 13.8% annual rate. This was below our standards and signals it’s a low quality business.

2. Operating Margin Falling

Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.

Analyzing the trend in its profitability, Nu Skin’s operating margin decreased by 7.6 percentage points over the last year. The company’s performance was poor no matter how you look at it. It shows operating expenses were rising and it couldn’t pass those costs onto its customers. Its operating margin for the trailing 12 months was negative 4.6%.

3. EPS Trending Down

Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Nu Skin, its EPS declined by more than its revenue over the last three years, dropping 42.7% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

Final Judgment

Nu Skin doesn’t pass our quality test. After the recent drawdown, the stock trades at 8x forward price-to-earnings (or $7.59 per share). While this valuation is optically cheap, the potential downside is still huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at Yum! Brands, an all-weather company that owns household favorite Taco Bell.

Stocks We Would Buy Instead of Nu Skin

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