Steven Cohen Is Betting on Oprah's Stake in Weight Watchers
Steven Cohen (Trades, Portfolio) has acquired 3.79 million shares of Weight Watchers (WTW) at an average price of $16.93. His position looks to be inspired by Oprah Winfrey, who became a shareholder, board member and endorser of the company. She bought 10% of the company and has options that bring her stake up another 5%. Before Winfrey arrived on the scene, Cohen did not own shares. His current stake represents about a ~5% stake in the equity.
Warning! GuruFocus has detected 4 Warning Signs with WTW. Click here to check it out.
The intrinsic value of WTW
Weight Watchers has been on an absolute tear since Winfrey joined and its price was below $7 a share. Since Friday at the close, it is now nearly $23. Although it is unlikely that Cohen will send shares surging like Winfrey did, the guru and founder of SAC Capital and of Point72 Capital was once called the Hedge Fund King in a 2006 Wall Street Journal article, and Bloomberg included him within the 50 most influential ranking in the Bloomberg Markets Magazine as recently as 2011. Weight Watchers has been a very popular short among hedge funds, but that could change rapidly. A star investor betting long against you can be very uncomfortable as Ackman* will tell you.
The problem with Weight Watchers over the past couple of years has been that its model became outdated. Weight Watchers was very much centered on weight loss, while today the approach to health is much more holistic and health is much trendier. I am calling a name change to Health Watchers here. That problem was exacerbated by the advent of weight loss assisting free apps and technological gadgets that track your fitness progress. The arrival of these competitors made it harder for the company and shareholders to understand what was really going on.
The company proceeded to lose members and revenue steadily declined. Revenue decline is a particularly nasty problem if you have a business model with lots of operating leverage and utilize debt. Weight Watchers is actually levered to the hilt with over $2 billion in long term debt. Precisely because of its precarious financial state, the company was a very attractive short. The shorts are now getting squeezed with Winfrey holding 10% of newly issued but tied-up equity, Cohen holds 5% and long time shareholder Artal Group holds approximately 46% of the shares, while demand for the remaining float is high. It is the same underlying mechanic, perhaps aided by the short squeeze, that is now launching the company in the opposite direction. Its financial structure is like a coiled spring. How often do you see the stock of an established company go up 200% in a matter of weeks?
Cohen is no longer managing outsider money like he did at SAC Capital, and now runs his own money at a renamed firm called Point72 Capital. This happened after SAC Capital, after years of legal battle, ended up settling with the SEC on four counts of securities fraud and one count of wire fraud. The firm plead guilty to all counts, paid a $1.2 billion fine and no longer manages outside money.
Point72 is a new company, of course, but it seems likely to me that the firm's focus is still on incredibly thorough fundamental research, which at one time made it one of the most successful hedge funds.
Back in October I contributed an article to GuruFocus called " Why There Is More to Come After the 100%-Plus Run for Weight Watchers" and there I came up with a way to look at the future value if Oprah gets the company going again, and I think it is still highly relevant:
If sales can go back to 2012 levels, we are looking at $540 million in EBITDA. In that scenario the company also has much better and credible prospects (if only because of its increased ability to deal with its debt) and is likely to be awarded a higher multiple. If it is awarded a 15x multiple (up from 10x currently) at a doubled EBITDA (requires roughly a 50% increase in sales) you are looking at an equity value of $5.6 billion. That would translate to an increase of the share price of 500%-plus. That is the coiled spring effect I am talking about. Of course, this is not the only scenario possible. Perhaps Winfrey fails spectacularly in refreshing the brand. However, I am betting she will have some semblance of success and think the odds are with me.
With Cohen and his track record on the same side of the bet, I can not help but feel a little bit more secure about my position in a company with so much uncertainty ahead of it and which is difficult to value. Call me human. We will see who will be the first star manager to go short.
*After Ackman made his short position in Herbalife public, Carl Ichan went long and was very vocal about it as well.
Disclosure: I am long Weight Watchers.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 4 Warning Signs with WTW. Click here to check it out.
The intrinsic value of WTW