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Herbalife shares tank by 5%, other 'multilevel marketing firms' falling as well

  • A report from China's Phoenix New Media said four government departments will start "to carry out special rectification activities: resolutely eradicate all kinds of MLM organizations," according to a Google translation.
  • The stocks reacted to the news because China accounts for a large part of these companies' sales, said Timothy Ramey, an analyst at Pivotal Research Group.

Shares of Herbalife, USANA Health Sciences and Nu Skin Enterprises took a hit Monday on a report that China may be cracking down on so-called multilevel marketing companies.

Herbalife's stock dropped 5.25 percent, while USANA and Nu Skin shares both fell more than 7.4 percent.

A report from China's Phoenix New Media said four government departments will start "to carry out special rectification activities: resolutely eradicate all kinds of MLM organizations," according to a Google translation.

The report also states:

"According to the Voice of China, 'National News Network' reported that the State Administration for Industry and Commerce today informed that the joint Ministry of Education, Ministry of Public Security, Ministry of Social Affairs and other departments, from tomorrow to start The three months of the pyramid selling activities of special rectification action, the name of "business, employment," under the guise of "recruitment" and "introduction of work" in the name of lure job seekers to participate in various types of MLM organizations, resolutely eradicated."

The stocks reacted to the news because China accounts for a large part of these companies' sales, said Timothy Ramey, an analyst at Pivotal Research Group. In an email to CNBC.com, Ramey said about 19.6 percent of Herbalife's revenue comes from China, while Nu Skin and USANA derive 29 percent and 52 percent of their sales from China.

HLF, NUS and USNA intraday chart

Source: FactSet

"We have reached out to HLF, NUS and USNA and heard back from the first two stating that they don't know anything about it, but they are reaching out to their people in China for color," Ramey said. "It is a good thing that HLF and NUS don't know anything about it. That does not mean they are not impacted but we assume that they would know if their businesses were being targeted."

Ramey has a buy rating on all three stocks, with a price target of $70 on USANA, $80 on Nu Skin and $120 on Herbalife.

None of the companies responded to CNBC's request for comment.