• Research

Mar 1, 2017

S3 BLACKLIGHT: Weight Watchers Looking to Squeeze out Short Sellers and Profits in 2017

Weight Watchers Intl. Inc. (WTW US) announced positive 2017 EPS guidance after Tuesday’s close and shares rose almost 20% in after-hours trading. WTW is up 26% in early trading to $18.90. Oprah Winfrey, Weight Watchers’ spokeswoman and 10% owner, has helped drive subscriber growth and the diet company is projecting that full-year 2017 EPS will be $1.30-$1.40 versus analysts’ estimates of $1.17.

WTW short interest has been increasing steadily since it hit its historical high in May 2011. By the beginning of 2015 short interest was equal to half of its float and has continued its upward trend, with short interest levels at two thirds of its float today. WTW short interest is nearing its maximum levels as over 90% of lendable shares have already been taken down. Stock borrow fees are reflecting this tightness of supply with rates increasing from 12% fee in January to 56% fee on outstanding positions today. New stock borrows to cover today’s shorts are going at a 99% fee.

There is a reason why WTW’s stock borrow demand is so high - short sellers made $113.8 million in net of financing mark to market profits, up 53.13% in 2016, on an average short balance of $214 million. Although ultimately profitable, the WTW short was an expensive trade to keep on due to high stock borrow fees. Stock loan fees averaged 27.27% in 2016, with short sellers paying $62.8 million of financing costs in 2016.

But just like yo-yo dieters, WTW trading profits were fleeting. WTW’s stock price has rebounded in 2017, increasing 65% to $18.90 in early morning trading today. With an average position of $224 million, short sellers are down $156 million, or 69.75% in YTD 2017. Short sellers gave back all of their 2016 profits and more – they are down $42 million, or 19.58% over the last 14 months. With stock borrow rates climbing, it has been even more expensive to keep on a short in 2017 than 2016. Short sellers have paid $53.9 million in stock borrow fees in just over two months in 2017 versus just $21.5 million in all of 2016.

Short sellers are gradually running out of bullets, with approximately only one million shares of stock left to borrow on the street, long buyers will not have to offset much short selling in order to continue driving WTW’s price up. And with stock borrow rates on new short sales hovering around the 100% fee level, there might not be that much net Alpha left for short sellers to consume.

If short side conviction wanes in the face of a rallying stock price and 50%+ fees on established short positions, WTW may be poised for both a  stock price and borrow liquidity short squeeze as short sellers find tastier trades in other stocks. An extended rally in WTW might see over $100 million of short sellers buying to cover and lifting WTW’s stock price even higher.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.


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