Weight Watchers (WTW – Snapshot Report) not only did the company beat the Zacks Consensus Estimate in the most recent earnings report, but they also guided to what many would call beatable levels. In fact, on the earning conference call, the company guided analysts to expect to see gross margins declining by 525 basis points. Despite this obvious headwind, analysts raised earnings estimates and that has pushed the stock to a Zacks Rank #1 (Strong Buy) and today it is the Bull of the Day.
15% Stake for Oprah Winfrey
Much was made of the Oprah impact on this stock when it was announced that she purchased a 10% stake in the company in form of newly issued shares. The deal also included an option for another 5%, which she will undoubtedly exercise as the strike price was around $6 at the time and the stock trading approximately $20 higher.
On the November 5 earnings conference call, management noted that there will be strong marketing efforts ahead, but did not want to give any details for competitive reasons. This implies that Oprah could be part of a post-holiday weight loss media blitz that could breathe fresh life into the business.
There were reports that Oprah has been on the diet before the announced stake purchase and had already lost 15 pounds. A further reduction in weight will only drive more interest in the WTW program.
Weight Watchers provides weight management services worldwide. It offers a range of products and services comprising nutritional, exercise, and behavioral tools and approaches. Weight Watchers was founded in 1961 and is headquartered in New York, New York.
WTW has a pretty strong earnings history. The company has topped the Zacks Consensus Estimate in 5 of the last 7 quarters. Over that span, the company missed the mark one time and met the mark another.
What should not be lost on investors is the sizable impact that earnings results tend to have on the share price. The stock surged 38.7% following the more recent report which was a beat of $0.09 or 30% positive earnings surprise.
The quarter before that was the one that the company met expectations. Still the stock jumped 21% in the session following the release. Those are pretty large moves.
Aside from the recent 6% stake buy in from Steve Cohen of Point 72 Asset Management (formerly known as SAC Capital), there is another glaring reason as to why investors continue to load up on shares of WTW. There is a sizable short position that is punishing the bears on this name.
Here is the number of shares sold short as reported a bi-monthly basis from NASDAQ.com:
As you can see, the short position was building early in the summer as there were “only” 9.1M shares sold short in mid-May. That number worked itself up to a high of 15.9M in mid-July.
The idea is that the short position has remained very high through the Oprah announcement and through a 38% increase in stock price following the earnings release.
The next few dates of importance for this stock become December 9, when the 11/30 short position is announced. After that, expect more short position data for the 12/15 time frame to be released on 12/24/15 after the close.
The problem for the shorts becomes what might hit next? Commercials from Oprah, a sizable boost in new members? There a lot of levers for management to pull and they indicated on the recent conference call that upfront pricing would be lowered. That idea alone is probably responsible for increased revenue projections.
Since I mentioned the revenue projections, I might as well show you how the Zacks Consensus Estimate for revenue has changed over the last few weeks. I also added the stock price movement to show why Wall Street is all abuzz over this stock.
I have seen other articles out there suggesting that if you bought the stock at $6, sell now because “you made your year.” But that sounds like something only a bear would say, kind of like saying it was low priced and you made money, but there is no more money to be made. That is a completely nonsensical statement. The stock could go significantly higher, and if estimates keep moving higher, the stock price will likely follow.
Follow Brian Bolan on twitter at @BBolan1
Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Stocks Under $10, an investor service , where he recommends the stocks in the portfolio.
Brian also runs the brand new Zacks Game Changers where he looks for stocks that are disrupting their industries and reaping big gains.