WTW Stock Is Looking Expensive
Fitness and weight management company Weight Watchers International, Inc. (NYSE:WTW) has to be one of the biggest success stories of 2015. Trading under $7.00 only a month ago, WTW stock has shot up more than 280% in this short span. Media mogul Oprah Winfrey’s public endorsement and personal investment in the company has taken Weight Watchers stock to highs not seen in a year. However, there’s another covert factor in play that prospective investors might be overlooking here.
Why Is Weight Watchers Stock Rallying?
Ostensibly, the boost to the stock is coming, in part, from management’s optimistic guidance about the company’s expansion in international markets. With Oprah on board, the company is seeing avenues opening up in new markets, where Oprah’s popularity could help build the brand. However, the biggest reason behind its rally has little to do with the company’s business, core fundamentals, or the latest headlines and more to do with a market anomaly.
WTW stock is witnessing a historic short squeeze. The stock has a massive three-quarters, technically 73%+ of its outstanding float, short. The rally on Wednesday was another episode of short sellers hitting the market.
For those of my readers who don’t understand the phenomenon, a short squeeze occurs when short sellers move to the open market in droves to cover their short positions. The result is the simple demand-supply phenomenon, whereby excess demand for the stock ends up pushing its price up.
Now, I had forewarned my readers a month ago that a short squeeze was coming that will artificially inflate the stock price. The problem is that the underlying fundamentals for the stock haven’t changed. Theoretically, this means that the stock price should correct itself in the long run.
The biggest challenge Weight Watchers currently faces is the stiff competition in the fitness and wellness industry. Weight Watchers’ business model depends on people’s willingness to sign up to its premium weight management services. But with the advent of technology in all walks of our lives, fitness tracking has become easier with a flick of the thumb on our smartphones.
With free fitness tracking apps now ubiquitous and fitness wearables almost becoming daily-use commodities requiring even less effort when tracking progress, Weight Watchers’ premium services appear less and less attractive. In the long run, the only way to survive will be to look for a partnership with a fitness wearables company or some other form of technology that could help Weight Watchers match up with the changing industry dynamics.
In terms of fundamentals, the heavy debt load should be a big concern for prospective investors. A quick glance at the balance sheet puts me off. Liabilities are outweighing assets, returning equity in the red. Even the current ratio is under one, raising concerns over the company’s liquidity. And its income statement is no different, with both top- and bottom-line numbers shrinking.
Compare all of this to its peer, Nutrisystem, Inc. (NASDAQ:NTRI), which is growing revenue and earnings, has a clean balance sheet with no debt, holds a strong cash position, and even pays a dividend with a 2.9% yield.
To sum it all up, there are too many headwinds at play for Weight Watchers. If I were to invest in this industry, I’d rather pick NTRI stock over WTW stock.
The Bottom Line on WTW Stock
In all its likelihood, the “Oprah factor” could prove a boon to Weight Watchers stock in the long term, but until I see a promising turnaround in the company’s earnings, I’d be waiting on the sidelines.