The Catalyst That Could Spark Another Post-Earnings Rally for Weight Watchers

WTW short interest is extremely elevated ahead of earnings

Nov 3, 2017 at 12:00 PM
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Earnings season is in full swing, with today's report from Apple (AAPL) dominating the equity news flow. And after the closing bell on Monday, traders will digest results from weight management services provider Weight Watchers International, Inc. (NYSE:WTW). Here's a closer look at what traders are expecting from WTW stock ahead of earnings.

WTW Makes Big Moves After Earnings

Weight Watchers stock has nearly quadrupled in value this year, though the shares have consolidated some gains since touching a four-year high of $49.32 on Aug. 14. At last check, the security was trading 0.3% lower at $44.30 -- but WTW shares could climb higher after Monday's earnings report, if past is precedent.

Historically, WTW shares have rallied the day after earnings in six of the last eight quarters, with an average post-earnings move of 17.3%, regardless of direction. On three occasions, the security skyrocketed more than 25% in the session immediately following earnings, including a 35.2% jump in November 2015 (which took place shortly after Oprah Winfrey became the stock's best-known investor).

For next Tuesday's post-earnings session, the options market is pricing in a bigger-than-average one-day swing of 19.7%, per at-the-money implied volatility data from Trade-Alert. A spike of this magnitude would send the security up to the $53 neighborhood -- in territory WTW shares haven't visited since early February 2013.

Shorts Could Provide Post-Event Rally Fuel

Despite the stock's stellar earnings history, short-term options traders appear to be bracing for a WTW decline. The security's Schaeffer's put/call open interest ratio (SOIR) of 1.34 ranks in the 82nd percentile of its annual range, telling us that near-term speculators are more put-heavy than usual ahead of the earnings event.

That said, much of the near-term put open interest on WTW is concentrated at deep out-of-the-money strikes in the January 2018 series, led by roughly 5,000 combined open positions at the 15- and 10-strike puts. In other words, it's likely that some of this put open interest was accumulated quite a while ago, and has since been left to expire worthless -- thereby mitigating the investor sentiment implications.

However, there's ample evidence of pessimism elsewhere. Despite a 4.9% drop in the most recent reporting period, short interest still accounts for roughly 23% of WTW's total available float. That hefty accumulation of shorted shares represents 6.2 times the stock's average daily trading volume -- representing ample pent-up buying power to support another of WTW's blowout post-earnings rallies, in the event of an upside surprise.

Meanwhile, only two analysts are even tracking WTW, with the ratings split between "strong buy" and "hold." If the company can manage another of its massive earnings beats, a round of new bullish analyst attention could also help the stock resume its 2017 surge.

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