Market Overview

Five Star Stock Watch: Herbalife

Five Star Stock Watch: Herbalife

"With a formal investigation now underway, the FTC could conceivably shut down Herbalife at any moment."

Wow. That sentence was part of a Motley Fool article on Herbalife's prospects moving forward now that the company is being investigated. 

Would you want to own a stock like that? According to the anaylsis below, the answer is probably no.

The company: Herbalife, Ltd.

Ticker Symbol: (NYSE: HLF)

Sector: Consumer Goods  

Industry: Personal Products

Herbalife Ltd., a nutrition company, sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products, and personal care products worldwide.

Related: Five Star Stock Watch: EMC

The company offers science-based products in four principal categories, including weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition.

Please take a look at the one-year chart of Herbalife below with added notations:

Well before the FTC investigation was announced, Herbalife had already formed a common reversal pattern known as a head and shoulders pattern. In other words, the stock seemed to be preparing to breakdown before the negative news even came out.

Now that the stock has broken lower, the pattern's price projection implies an eventual fall to at least $35. Investors who currently own Herbalife may want to exit their positions and lick their wounds. Traders not alreay having done so may want to look to get short the stock.

Related: Five Star Stock Watch: Lennar

Herbalife isn't set to release earnings until May 20, 2014.

No matter what your strategy, or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!

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