What: Shares of Weight Watchers (NYSE:WTW) surged for a second day on Tuesday, following the news that Oprah Winfrey was buying a stake in the struggling company. After the stock more than doubled on Monday, by 11 a.m. Tuesday, shares were up an additional 32%. The total gain from Friday's closing price now sits at about 170%.
So what: There was no new news on the Oprah front on Tuesday, but investors continued to pile into the stock. Weight Watchers has hired celebrities in the past to promote its products, including Jessica Simpson and Jennifer Hudson, but the deal with Winfrey represents a much deeper relationship. In addition to promoting Weight Watchers products, Winfrey is taking a 10% stake in the company and joining the board of directors.
Weight Watchers did receive an analyst upgrade Tuesday morning, which is likely contributing to the gains. An analyst at Barclays upgraded the stock from "underweight" to "equal weight," setting a price target of $14 per share, nearly triple the firm's previous target of just $5 per share. By 11 a.m. Tuesday, the stock had already surpassed this price target, trading at around $18 per share.
Now what: One thing to note is that, as of the end of September, nearly 16 million shares of Weight Watchers were sold short. With 57 million shares outstanding and a float of just 21 million, according to Morningstar, some of these gains could be the result of a short squeeze.
Analysts are expecting Weight Watchers to report earnings of $0.67 per share for the full year, putting the P/E ratio at about 27 following the gains so far this week. There's a massive amount of optimism now baked into the stock price, and while the Winfrey deal looks like it has a good chance of boosting sales going forward, the market may be getting ahead of itself.
Timothy Green 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.