Nu Skin stock tanks after Chinese investigation
Nu Skin shares plunged Thursday on concerns over an investigation by Chinese authorities' into its business practices in the country, a major source of its revenue.
Nu Skin stock was halted four times Thursday after plummeting 33 percent. (Click here to track the latest quote for the company's stock.)
The official Xinhua news agency said Thursday that China's State Administration for Industry and Commerce had ordered an investigation into Nu Skin. The move comes a day after the state-run People's Daily published a story that likened Nu Skin's coaching methods for salespeople to "brain washing" and suggesting that it is a pyramid scheme.
Xinhua quoted a spokesman for the industry and commerce office saying that authorities will take legal action if the "investigation results show the media reports were factual."
Nu Skin, based in Provo, Utah, sells skin care and nutritional products through a direct-selling model around the globe.
The company vehemently defended itself Wednesday, saying that the People's Daily article contains "inaccuracies and exaggerations that are not representative of Nu Skin's business in China." The company said the reporters did not verify any of the information with Nu Skin. It also said in a statement that the company is "dedicated to operating in full compliance with applicable regulations as interpreted and enforced by the government of China." Nu Skin has worked in the country for 11 years.
Despite its defense, shares of Nu Skin plunged nearly 16 percent Wednesday in high volume trading to close at $115.23.
(Read more: Nu Skin shares shed 16% after China attack)
Canaccord Genuity analyst Scott Van Winkle cut his rating on the company's stock to "hold" from "buy" on Thursday and decreased his target price to $104 from $140 on concerns about risk in China. The analyst said in a research note that the country represents roughly one-third of the company's revenue for 2013 by his estimates, making any upset in that market significant enough to hurt its performance and stock value.
"While we found yesterday's article to be the type of complaint multi-level marketers often face, we believe that any government investigation in China opens questions that we can't forecast," he wrote. "Even with laws to provide a path, we don't believe that anyone can predict the Chinese government in this instance."
The company is not the first to be hard hit by pyramid scheme accusations.
Nutritional supplement maker Herbalife's shares lost about 40 percent of their value in the days after hedge fund manager William Ackman accused it in 2012 of operating a pyramid scheme, in which a company makes most of its money by recruiting new salespeople, rather than on the products that they sell.
Herbalife has repeatedly denied the claims and rival investor Carl Icahn has disagreed as well, taking his fight against Ackman public and increasing his stake in the company.
The company's stock price later recovered and as of Wednesday's close, its shares are up 76 percent in the past 12 months. But its stock took a hit Thursday as well by association, falling more than 26 percent to $84.80.
—By The Associated Press with CNBC.com