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3 Reasons to Sell WW and 1 Stock to Buy Instead

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Over the past six months, WeightWatchers has been a great trade, beating the S&P 500 by 21.5%. Its stock price has climbed to $15.46, representing a healthy 36.8% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy WeightWatchers, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think WeightWatchers Will Underperform?

We’re happy investors have made money, but we don’t have much confidence in WeightWatchers. Here are three reasons why WW doesn’t excite us, plus one stock we’d rather own.

1. Revenue Spiraling Downwards

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. WeightWatchers struggled to consistently generate demand over the last five years as its sales dropped at a 12.4% annual rate. This was below our standards and is a sign of poor business quality.

WeightWatchers Quarterly Revenue

2. Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

While WeightWatchers posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, WeightWatchers’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.9%, meaning it lit $1.87 of cash on fire for every $100 in revenue.

WeightWatchers Trailing 12-Month Free Cash Flow Margin

3. New Investments Fail to Bear Fruit as ROIC Declines

We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.

Over the last few years, WeightWatchers’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

WeightWatchers Trailing 12-Month Return On Invested Capital

Final Judgment

We see the value of companies helping consumers, but in the case of WeightWatchers, we’re out. With its shares topping the market in recent months, the stock trades at 4.1× forward EV-to-EBITDA (or $15.46 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. Let us point you toward one of our top digital advertising picks.

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