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Direct Sellers Valuation Update

Valuations for direct selling stocks remain at or near historical lows following a very difficult year for the group in 2023. The 12-month prospective relative P/E ratio for our proprietary Direct Selling Index closed 2023 at a 43% discount to the market, having entered the year at a 35% discount to the market. This relative multiple contraction was despite a slight improvement in the prospective absolute P/E ratio to 11.2x at the end of 2023, up from 10.9x at the beginning of the year, since the multiple expansion for the S&P 500 was much greater, having expanded nearly 3 full multiple points on the year to close out at approximately 19.7x forward earnings. The contraction in the Direct Selling Index’s relative valuation in 2023 was also accompanied by a sharp underperformance in relative earnings. Prospective earnings for the index declined 27.6% in 2023, compared with a 5.8% increase in prospective earnings for the S&P 500. Therefore, the Direct Selling Index decline in 2023 of 20.3% sharply underperformed the 24.2% increase in the S&P 500. We calculate that the hefty dividend yields at Medifast (MED) and Nu Skin (NUS) added 4.6 pp to the index’s performance in 2023, helping buffer the declines, although with its recent strategic shift, MED recently eliminated its dividend. Things have not improved much in 2024. Through January 23, our Direct Selling Index has declined another 13.7% versus a 2.6% increase in the S&P 500. Prospective earnings for the index have declined 0.8%, while they have increased 0.6% for the S&P 500. Meanwhile, the prospective P/E ratio for the index has contracted 1.3x and currently stands at 9.9x, while the prospective P/E ratio for the S&P 500 has ticked up to 20.1x forward earnings. Therefore, the prospective relative P/E ratio for our Direct Selling Index currently stands at a 51% discount to the S&P 500, depths not seen since 2000 during the tech bubble, when investors seemed to be using anything that wasn’t Tech, Media, or Telecom as a source of funds to chase it. In our experience, any improvement in the fundamental picture for these names could be accompanied by a significant valuation adjustment; mean reversion can be a powerful thing.