Schaeffer's Trading Floor Blog

Weekly Contrarian: Is Weight Watchers Ready to Prove the Skeptics Wrong?

WTW could be poised for some contrarian tailwinds in the near term

by 12/5/2012 12:49 PM
Stocks quoted in this article:

Bloomberg Businessweek recently featured an article entitled, "Weight Watchers' Big Fat Marketing Dilemma," in which the author calls into question Weight Watchers International, Inc.'s (NYSE:WTW) big-money marketing maneuvers.

These celebrity-driven tactics are tricky for weight loss companies, states the author, as the spokespeople often find it difficult to keep the pounds off. Additionally, the columnist doubts whether the exorbitant expenditures are worth it, considering most consumers fail to recognize which famous face is associated with the respective weight loss company. Keeping these arguments in mind, the author wonders whether the well-funded marketing campaigns are worth the money relative to WTW's bottom line.

Takeaway

After starting off 2012 strong, WTW took a stumble in early May following an earnings miss. However, the stock has rebounded in recent months, adding nearly 20% since hitting its year-to-date low of $40.60 on Aug. 2. In fact, the stock jumped 16.7% on Nov. 6, after its most recent quarterly results beat analysts' bottom-line estimates.

Skepticism toward WTW is evident on the Street, though. The stock's 50-day International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE)/NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.86 ranks higher than 58% of other such readings taken in the past year. In other words, speculators have bought to open puts over calls at an accelerated clip in recent months.

Outside of the options pits, short sellers increased their bearish exposure by nearly 23% in the most recent reporting period, and short interest now accounts for a lofty 10.1% of the stock's available float. It would take almost a week to cover these shorted shares, at WTW's average daily trading volume.

Additionally, of the five analysts covering WTW, four maintain a middling "hold" recommendation toward the stock, while the average 12-month price target of $56 represents a slim 11.8% premium to the equity's closing price of $50.07 on Tuesday, Dec. 4.

From a contrarian perspective, these elevated levels of skepticism surrounding a stock that's been rising on the charts could have bullish implications. In the near term, a capitulation from these remaining disbelievers could provide WTW with a fresh wave of buying power.


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