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Is Weight Watchers International, Inc. a Smart Short-Sell?

By Tamara Walsh - Jan 5, 2015 at 3:12PM

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Many investors are betting against Weight Watchers stock today. Could that be a bad move?

Weight loss was the No. 1 new year's resolution last year, according to Statistic Brain, and it's on a lot of people's lists this year. Therefore, what better way to ring in the new year than by looking at shares of Weight Watchers (WW -1.16%)? The stock was down roughly 20% in 2014, and with more than 18% of outstanding shares sold short, it seems many investors are betting against the weight management services company. If you short a stock it means you make money when the stock price declines. Let's check whether Weight Watchers could be a smart short-sell or if there is hidden upside in the stock heading into 2015.

Weight Watchers knows it has a problem
Investors typically place short bets on a stock when they believe it is overvalued or expensive from a valuation standpoint. However, this isn't the case with Weight Watchers. In fact, the stock is trading at just 10 times earnings, which is well below the consumer services industry average P/E of 22. Thus, the blame more likely falls on Weight Watchers' weak balance sheet, which has attracted the attention of short-sellers. With a debt load that outweighs its assets, the company is now working to turn things around -- particularly in member recruitment.

The weight loss giant has struggled to add new members in recent years. "Turning around recruitment declines remains our top priority for 2015," said Jim Chambers, Weight Watchers' chief executive, in a press release announcing third-quarter earnings.

The company's turnaround efforts are already under way. With new products and services, including personalized "coaching," and the introduction of its new marketing campaign -- "Help with the hard part" -- investors might want to think twice before short-selling Weight Watchers. Weight Watchers' new offering should help the company attract new members with the promise of 24/7 support from a "lifestyle coach". Meanwhile, more flexibility and customization of services should help the company retain more members over the long haul. 

Nevertheless, to be fair, any turnaround in shares of Weight Watchers will take time. Moreover, 2015 will be a transitional year as the company invests in new services and beefs up old offerings. Still, given management's efforts to right the ship, I believe investors would be better served on the sidelines.

A fresh look in the new year
Earlier this month, Weight Watchers revamped its digital Essentials program and increased the monthly fee to $19.95, up from $18.95. It also unveiled a new offering called the Weight Watchers Personal Coaching plan, which includes one-on-one support from a trained weight loss coach. By offering options that are more customizable across various platforms, including in-person consultations, online, and mobile, Weight Watchers should be able to fuel revenue growth in the years ahead.

Additionally, it is important to remember that Weight Watchers operates globally in an increasingly lucrative market. Americans now spend a whopping $60 billion annually on weight loss programs, while the international weight loss market is now worth about $586 billion, according to data from Markets and Markets.

Weight Watchers has room to reposition its brand and grow its business both in the U.S. and abroad. After all, this is still one of the more profitable businesses in its industry. Longer term, the company's operating margin is set to grow to 25% by 2018, according to research from Morningstar. Therefore, before shorting the stock, investors might want to remain on the sidelines for the first half of 2015 to see if the company's new marketing campaign and rebranding efforts resonate with consumers.

Tamara Rutter has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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