Weight Watchers (WTW) has been on a tear since it was announced on Oct 19 that Oprah Winfrey had bought a 10% stake in WTW and was forming a partnership with them to help promote their products. In fact, since Oct 16 close (before the news announced) and Nov 9, the shares have increased by 2.5X.
As mentioned previously, I have a signifcant stake in WTW, albeit at significantly higher prices, so this news was good for me. When the news was announced on Oct 19, the shares immediately doubled and it was very tempting to offload my position. However, I held on an was subsequently rewarded when the price increased above my average cost price on Nov 6. Since then, I’ve been doing scaled up selling, more than halving my position.
I do think that this Oprah Winfrey news is very significant. The market also seems to think so since the price has gone up so much though shareholders are actually diluted by the new 10% shares that were sold to Oprah. The potential increase in revenues is very large. This seems confirmed by WTW’s Q315 earnings release and conference call. However, I feel it is prudent to reduce my position and perhaps buy again if the stock goes to say ~$15.
Another learning point is that celebrities can have signifcant effect on companies and the stock market. This is the first time that Oprah has effectively promoted a company and partnered with one to this extent. Her success with taking obscure books to national level is an example of her star power. Thus, it is good to be kept abreast with the culturally significant celebrities such as Taylor Swift. I feel vindicated on my decision to purchase those really expensive tickets and attend her concert.
Lastly, I would have done much better here if I had continue to average down on my WTW position while it fell. Most of my position in WTW was established through short put options at the $20-$25 range with some hefty premiums received (>20% return on the cash-secured portion). WTW fell all the way to $3.67, If I had continue to average down on my position, whether through dollar-cost averaging or by number of shares, I would have done much better in this position and made far more money. Instead, I’m left with modest gains though of course I erased a huge mark-to-mark lost.
To average or not to average is always a difficult consideration. On one hand there is the fear of catching a falling knife and putting good money to chase bad money, while there is the fear of missing out on lower prices on the other hand. In the past, I’ve frequently blindly averaged down on many positions while I nowadays only average down at strategic price points. In the case of WTW, it was a particularly hard call because there didn’t seem to be any light at the end of the tunnel. In hindsight, I do think that at $4-$5, I should have averaged down a little since my cost basis was $22 at that point.