Over the past six months, Herbalife has been a great trade, beating the S&P 500 by 17.7%. Its stock price has climbed to $8.72, representing a healthy 21.4% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Herbalife, 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.

We’re glad investors have benefited from the price increase, but we're swiping left on Herbalife for now. Here are three reasons why you should be careful with HLF and a stock we'd rather own.

Why Is Herbalife Not Exciting?

With the first products sold out of the trunk of the founder’s car, Herbalife (NYSE:HLF) today offers a portfolio of shakes, supplements, personal care products, and weight management programs to help customers reach their nutritional and fitness goals.

1. Demand Slipping as Sales Volumes Decline

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

Herbalife’s average quarterly sales volumes have shrunk by 6.3% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable.

2. Projected Revenue Growth Shows Limited Upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Herbalife’s revenue to stall. Although this projection indicates its newer products will fuel better top-line performance, it is still below average for the sector.

3. EPS Trending Down

We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Herbalife, its EPS declined by 25.6% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

Final Judgment

Herbalife isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 4.3× forward price-to-earnings (or $8.72 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the most entrenched endpoint security platform on the market.

Stocks We Would Buy Instead of Herbalife

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