It's Time to Take the Weight Off...
By Jeff Clark
February 06, 2007
The seasonal factors that made Weight Watchers stock (WTW) a buy in November make it a sell just about now.
Just before Thanksgiving, I told you about bullish tendencies for WTW heading into the holidays. The stock is up about 15%, which is not too bad for 10 weeks. And it's time to close out the trade.
In fact, it's time to start thinking about shorting the stock.
WTW now tips the scales at about 27 times earnings. That's a little bit plump for a company whose revenues are growing only 6% per year. There's nothing wrong with the company, but the stock's valuation is busting at the seams.
And, then of course, there's the technical pattern…
Notice how the stock peaks some time after the holidays each year and then suffers a sizeable decline heading into April.
Of course, this pattern by itself isn't enough to justify shorting the stock. But given the recent action in shares of NutriSystem (NTRI) – Weight Watchers' chief competitor – it's a pretty compelling idea.
NTRI was sitting comfortably above $60 per share until last week, when the company announced that revenues – which are growing at five times the pace of WTW – were starting to slow. Investors reacted to the news like an Atkins dieter reacts to pasta and threw the shares away.
NTRI now crosses the tape at $44 per share, 30% leaner than where it was last week.
So if Dan Marino and the rest of the chubby retired athletes who star in the NutriSystem commercials can't generate the growth necessary to keep investors happy with NTRI, it's hard to imagine how Weight Watchers will do the trick.
I haven't shorted WTW yet. But it is one of a handful of bloated stocks that looks ready to go on a diet.
Best regards and good trading,
Jeff Clark
