Multi-level marketing stocks are taking it on the chin in 2014. The top 10 companies by market cap are down an average of 15.2% year-to-date through Aug. 1 — 20 percentage points worse than the S&P 500.

If you factor out the 58% gain from CVSL (CVSL) — the holding company that owns Longaberger, Your Inspiration at Home and several other direct selling concepts — the carnage is even worse.

Three things are conspiring against MLM stocks: Bill Ackman, earnings and China. The trio of items makes it incredibly tough for any of these businesses to gain momentum.

Is this latest series of events simply a cyclical downturn that hits every industry from time to time, or is there something else happening that is more permanent in nature … something that these stocks might not recover from?

Here’s a closer look at how each factor is weighing on MLM stocks:

MLM Stocks and Bill Ackman

It’s likely that the hedge fund manager won’t be invited to industry gatherings any time soon. His billion-dollar bet against Herbalife (HLF) led to one of the most eagerly anticipated powerpoint presentations in the history of investing. Ackman was thought to be delivering a “deathblow” to HLF stock itself and the MLM industry as a whole.

Fortunately — dependeing on whether you are long or short — Ackman’s July 22 presentation failed to deliver the promised deathblow, leading to a huge relief rally for HLF stock, jumping 25% minutes after three-and-a-half hour snooze fest was over. Ackman’s presentation was so bad that even he himself has been critical of his performance.

I personally watched the entire presentation. It was painful to see a really bright guy stumble his way through what could and should have been his finest moment. MLMs have been under the microscope for years accused of tactics that are questionable both from a legal and moral perspective.

Rather than make a really dull presentation, Ackman should instead lobby the Federal Trade Commission to require MLMs to undergo a stress test like the banks do proving their financial viability. Specifically, if an MLM can’t provide substantive proof that a distributor can make a living selling (not recruiting) its products or services, than it doesn’t possess a legitimate business model, and should be subject to regulatory sanctions including being forced to cease operations.

If Ackman were to go this route — likely a lengthy and very expensive proposition — MLM stocks would face tremendous downward pressure for years to come.

Earnings Go South

InvestorPlace’s Dan Burrows reported July 29 on Herbalife’s earnings and revenue miss, its first in two years. At the end of his article, he recommended that average investors avoid HLF stock at all costs. I couldn’t agree more.

Whether MLM stocks are making money is irrelevant at this point (although many aren’t). Yes, HLF delivered $1.55 in adjusted earnings per share in the second quarter while also raising its full-year guidance. But there are serious questions about the sustainability of its growth, including a U.S. business that’s not doing well. While HLF is probably one of the healthier MLM stocks (Bill Ackman aside) reporting earnings over the past week, it’s still facing some hiccups in its business.

As for other MLM stocks…

Avon Products (AVP) reported Q2 earnings July 3; operating earnings were down a whopping 54% year-over-year, although there was some chatter about CEO Sheri McCoy’s two-year turnaround finally getting some traction. Tupperware’s (TUP) second quarter wasn’t nearly as bad as Avon’s, but sales were still off by 2% with operating profits down 13%. With its business facing some strong comps from 2013, CEO Rick Goings was reasonably happy with its performance in the quarter. Lastly, Usana Health Sciences (USNA) reported zero revenue growth in Q2 with a 24% decrease in operating profits, a result of lower gross margins and higher operating expenses.

At the end of the day, revenue growth for the big MLM stocks in the second quarter was muted at best, with profits substantially reduced. You can’t blame Bill Ackman for these numbers. For the next few quarters, we’re going to see very sporadic results, which should continue to weigh on MLM stocks.

China Remains Risky

Citron Research released a press release July 15 saying, “It is Citron’s belief that as much as one-third of Usana’s revenue and half its revenue growth are dependent on widespread illegal MLM operations in China.” This follows on last year’s report detailing how Usana is breaking all sorts of laws in mainland China.

While I can’t speak to the veracity of Citron’s research, I do know that other MLM companies have been in the news in 2014 on Chinese-related issues.

Nu Skin (NUS) reports Q2 earnings Wednesday before the markets open. Sam Antar, who contributes to Seeking Alpha and was himself behind one of the “largest securities frauds of its time,” wrote a piece Monday about Nu Skin’s bloated inventory. Antar, and co-author Zachary Prensky believe this inventory problem is mostly a result of a serious decline in the number of sales leaders in China due in part to a government crackdown on MLM companies.

In March, Nu Skin settled a dispute with the Chinese government over the sale of unregistered products by paying a $540,000 fine. That’s the good news if you own NUS stock. Unfortunately, the Chinese government could decide at any moment that NUS is running an illegal pyramid scheme and shut it down completely eliminating much of its growth. It’s for this reason Bank of America’s (BAC) downgraded NUS stock.

Quite simply — MLMs operating in China are playing with fire.

MLM Stocks Overall

Where there’s smoke, there’s fire … and while all of these speculative reports may be little more than conjecture, it’s important to remember that the No. 1 rule of investing is to preserve capital at all costs.

Can MLM stocks recover from the downward spiral they find themselves at the moment? I suppose they could. But why would any sane investor wait around to find out when there are plenty of other stocks available that aren’t embroiled in regulatory issues?

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.