Why I See Weight Watchers (wtw) as a Strong Buy

Markets are efficient in that a big announcement by a company or a macro-economic event will instantly effect the price of a security. One cannot take advantage of this news once it has been released because the result, whether positive or negative, is instantly priced into the security. However, the Efficient Markets Hypothesis loses strength when it is understood that someone can generate alpha by predicting a big company change or macro-economic event and determine which way it will make the stock move. To take advantage of markets, an equity analyst must be able to foresee these critical events and determine how they will make a stock move. Markets can be taken advantage of when acting out of consensus.

Given this stance I would allocate capital towards companies that I feel have a high chance of being acquired in the future. I would buy shares of many different midcap companies that I feel could benefit from M&A in my investment horizon. In order to hedge the risk of these companies not being acquired I would diversify my portfolio across multiple sectors that I feel will have success over my investment horizon. If I were to enact this strategy right now I would invest in midcap companies with M&A potential across the consumer discretionary, energy, and technology. This would expose the inefficiency of markets by taking advantage of big occurrences that have not yet happened and will most likely increase the stock price.

I see Weight Watchers (WTW) as a Strong Buy due to increases in consumer confidence, technology, and technical indicators. On June 18th, Weight Watchers reached an all-time high of $105.73. Since then the stock has plummeted down to approximately $69 due to a second quarter report which announced a decrease in subscribers. However, the second quarter earnings and revenue beat expectations and full-year guidance increased. I view the 34% decrease in stock price since the high on June 18th as an overreaction that leads to a great opportunity for all who are bullish on Weight Watchers.

Consumer confidence is at an 18-year high and this means that consumers can splurge on discretionary goods. The American consumer has the freedom to treat themselves by subscribing to Weight Watchers as opposed to worrying about daily essentials. Periods of high consumer confidence are most often the times when health and fitness stocks do best. Thus far in 2018 the health and fitness sector has boomed as stocks such as Medifast, Herbalife Nutrition, Planet Fitness, and obviously Weight Watchers have all significantly outgained the S&P 500. Weight Watchers represents an opportunity to invest in the health and fitness sector at an undervalued price due to the overreaction of the decrease in subscribers.

Another reason why Weight Watchers has so much room to grow is its commitment to incorporating technology into its approach to being fit. Weight Watchers uses trackers on both the Apple Watch and Fitbit in order to reward members with points that help gauge their progress. By using this point system Weight Watchers is able to create a user-base that is much easier to retain because they are tracking their progress in the app. On top of these technological advances, Oprah Winfrey is also a board member and spokeswoman for the brand. She has managed to change the cultural perception of the brand from a somewhat embarrassing weight loss brand into a healthy living lifestyle company. This transition has been important because as social media is surging, public perception has become more important than ever and people want to be using a platform that they can be proud of.

My final reason for why Weight Watchers is currently a strong buy is thru technical analysis. The stock price is currently at a support level and appears to be bottoming out as it prepares to bounce back up. The relative strength index (RSI) is at a value of 43 which means that the stock is slightly oversold. This is the lowest RSI the stock has seen since December of 2016. Along with this low RSI the Moving Average Convergence/Divergence (MACD) has reached a point of significant divergence and appears to be converging back to a cross which would indicate upward momentum. Although technical analysis is a gauge of historical data and stocks are traded based on future value I like to look at the technical indicators as a last check to confirm my opinion of a stock and for Weight Watchers my opinion of this being a Strong Buy is certainly supported.

I will concede that Weight Watchers’ decrease in subscribers could present risk moving forward if the trend continues. A decrease in Q2 subscribers could indicate that weight loss resources are incredibly prevalent at this time and a paid subscription is simply not worth the money due to all the free information available. However, I do not feel that this is the case because Weight Watchers has made changes to their product in order to separate itself from the free information that may be available on the internet. By incorporating technology into the product, Weight Watchers has created a product that has a sticky user base and is unique from its competitors. For all the reasons I have stated throughout this pitch I believe that Weight Watchers will surge to a new high of $120.