The 'Short Squeeze' Continues

New highs for Weight Watchers... The 'short squeeze' continues... A new bear market for crude... Beware the 'fracklog'... A clear sign that OPEC has failed...

We wrote it. Did you buy it?

In the May issue of Stansberry's Investment Advisory, Porter and his team recommended an unusual opportunity in a relatively illiquid and hated stock. From the issue...

A Weight Watchers (WTW) play is a speculation... For one thing, insiders and long-term institutional holders own a lot of the stock. We estimate around 80% in total. So, relatively few shares actually trade in the open market. This low "share float" makes the stock almost three times more volatile than the market... Any whiff of news – bad or good – will move shares in an exaggerated manner.

Weight Watchers is also one of the most heavily shorted stocks in the market. Currently, around 10 million shares are held short. That's a staggering amount, considering that the true "share float" is probably only 13 million shares.

Why would they recommend such a stock?

Well, after years of falling revenue and dismal results, the company finally appeared to be turning things around.

It famously recruited Oprah Winfrey – the most successful businesswoman in history – as an investor, board member, and spokesperson in 2015. And results have been slowly improving ever since.

Porter and his team believed this combination of low liquidity, extreme short interest, and better results set the stage for a huge rise in share price known as a "short squeeze." More from the issue...

Investors shorting Weight Watchers also like to point out that while Oprah has done a great job turning the tide, revenue is still well below 2012 highs, and growth is moderate. They argue that these whiffs of a turnaround do not justify the rapid ascent of the share price from $5 to $22.

Many of these investors who claim Weight Watchers is dying a long, slow death shorted shares in 2015 and 2016... and that could hasten our gains. It could lead to a "short squeeze" as the business continues to improve.

If you are unfamiliar with the concept of a short squeeze, Weight Watchers shares offer a great illustration. Short interest reached more than 20 million shares in February 2016. It peaked again in early February this year, when more than 18 million shares were held short. The company's impressive numbers in the fourth quarter 2016 and first quarter 2017 sent the short sellers buying back shares – at any price – to cover their positions. The result? Shares more than doubled in a few months.

Its improving numbers have led to renewed optimism for Weight Watchers... But a meteoric rise like that can only be attributed to frantic short sellers trying to cover. With almost 10 million shares still held short, the short-squeeze dynamic is still in play.

That's exactly what has happened so far...

Weight Watchers stock rose another 2.7% today, closing at a fresh 52-week high of $30.82 per share.

Incredibly, despite the big rally, short interest has only fallen from about 10 million shares to about 9 million shares held short. In other words, the "squeeze" still has plenty more room to run.

Of course, while this situation offered a compelling short-term opportunity, Porter's team also believed it was a great way to speculate on an ongoing turnaround. More from the issue...

Oprah is not the only high-powered woman who has come aboard... CEO Jim Chambers abruptly resigned in late 2016. To replace him, the company recruited Mindy Grossman, who was serving as CEO of Home Shopping Network (HSNI). Grossman led HSNI through an initial public offering ("IPO") in 2008. Under her leadership, shares soared from $12 in 2008 to nearly $80 by 2015.

Like all retailers, HSNI has taken a hit in the last couple of years... But Grossman is a fantastic hire. She won't need much on-the-job learning. HSNI is a bigger company than Weight Watchers, so she knows how to run a large public enterprise. And of course, HSNI serves the same target demographic as Weight Watchers. We can't wait to see what happens when Grossman officially starts in July.

When she arrives, Grossman will have some wind at her back. Weight Watchers released fantastic first-quarter numbers on Tuesday. After the 2014-2015 bloodbath, all metrics are surging... And the company has grown its membership for five straight quarters, including a 16% increase this past quarter. Total paid weeks are up 13%.

As they noted at the time, Oprah has been a big part of that. But she wasn't the only factor.

The data suggested the turnaround is real and multifaceted, and the company is finally headed in the right direction. But despite the recent rally, Porter and his team believed there was still plenty of room for growth ahead...

Revenues last year were nearly 40% below their 2012 peak, when shares were around $80. Even if revenues never hit those levels again, we expect the company's revenue and free cash to continue to grow as the "Oprah Effect" plays out.

Historically, Weight Watchers' enterprise value (market cap plus debt and minority interests less cash, or "EV") has traded around a value of 17 times its free cash flow ("FCF"). Today, it's trading well above that. But FCF has been depressed in recent years and is starting to turn around.

Last year, FCF more than doubled to $113 million. With Oprah and Grossman at the helm, we think it could roughly double again this year. Based on our projections, we estimate FCF of a little more than $200 million. With those cash flows, if Weight Watchers' EV simply returns to its average valuation over the last 10 years of 17 times FCF, the stock will be valued at more than $30 a share. If, over the next several quarters, FCF grows to more than $300 million – as it did back in 2011 – the stock could be worth $50 a share.

Stansberry's Investment Advisory subscribers are up more than 35% in less than two months.

A new bear market for crude...

Elsewhere in the market, crude oil fell again this morning to a new seven-month low. West Texas Intermediate ("WTI") crude – the U.S. benchmark for prices – fell nearly 3% to less than $43 per barrel for the first time since November.

This also means WTI is officially in a bear market again. It has now fallen more than 20% from its January highs. And today's selloff followed another round of bearish news...

Yesterday, the U.S. Energy Information Administration ("EIA") reported there were 5,496 drilled-but-uncompleted oil wells in the U.S., as of the end of May. According to the EIA, this represents the biggest backlog of wells waiting to be fracked in at least three years. And it means a huge wave of new U.S. shale production could be coming to market in the near future.

This morning, oil-cartel OPEC warned of rising production from Libya and Nigeria, two member nations that are exempt from its current output deal. As news service Reuters reports...

Libya's oil production rose more than 50,000 barrels per day (bpd) to 885,000 bpd after the state oil company settled a dispute with Germany's Wintershall, a Libyan source told Reuters.

Nigerian oil supply is also rising. Exports of Nigeria's Bonny Light crude are set to reach 226,000 bpd in August, up from 164,000 bpd in July, loading programs show.

Finally, we're seeing signs that the global oil "glut" is already growing again. As Bloomberg Businessweek reported this morning...

Just when it looked like the oil market might turn the corner, the warning signs appeared...

Once again, the volume of oil held at sea in tankers is rising, yet another indicator that the Organization of Petroleum Exporting Countries' output cuts haven't ended a global glut. This shouldn't be the case given OPEC's actions.

No, this shouldn't be the case...

But as you can see in the following chart, that's exactly what is happening... The latest data points show the amount of oil stored at sea has suddenly jumped back up to where it was before OPEC began to cut production in January...

We continue to believe oil is headed lower in the near term. In fact, as Porter and senior resource analyst Flavious Smith explained during last week's Commodity Supercycles webinar, we could see prices fall to less than $30 per barrel – or even as low as $20 per barrel for a short time – before this bear market ends.

New 52-week highs (as of 6/19/17): AbbVie (ABBV), Aflac (AFL), AMETEK (AME), Allianz (AZSEY), Boeing (BA), Becton Dickinson (BDX), Morgan Stanley China A Share Fund (CAF), CME Group (CME), iShares Select Dividend Fund (DVY), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), Eaton Vance Enhanced Equity Income Fund (EOI), Fidelity Select Medical Equipment and Systems Fund (FSMEX), Global X MSCI Greece Fund (GREK), Mid-America Apartment Communities (MAA), 3M (MMM), Altria (MO), Annaly Capital Management (NLY), Paysafe (PAYS.L), Koninklijke Philips (PHG), ProShares Ultra S&P 500 Fund (SSO), Stanley Black & Decker (SWK), Tencent (TCEHY), TTM Technologies (TTMI), Two Harbors Investment (TWO), U.S. Concrete (USCR), Invesco High Income Trust II (VLT), Verisign (VRSN), Wabtec (WAB), and Weight Watchers (WTW).

In today's mailbag, several more subscribers respond to Porter's Friday Digest request. Have you benefited from our "big picture" advice? Please let us know at feedback@stansberryresearch.com.

"Porter and associates, I cannot remember the year, 2012 or 2013, you made a bet with Doug Casey that oil would fall drastically in price. If I recall, the bet involved $1000.00 or $10,000.00. At the time, I thought you were a hot air bag. Oil was high in price and I thought was only ever going to go higher. You lost the bet due to timing, not the accuracy of the call. That got my attention, and my interest. I feel my subscriptions are well worth the value." – Paid-up subscriber Andrew W.

"I find your lengthy commentaries to be most helpful, as with your article about mega trends. It's difficult for me to lift my head up and look out over the investment weeds, and your commentaries help me do precisely that." – Paid-up subscriber James B.

"Porter, I got into [two of Steve's China recommendations] a little later... but I'm up on both positions. I've tried a few small option positions on my own based on your strategy for the 'Dirty Thirty' I think you called them. Without subscribing to that particular service, I'm not sure if I entered each position at the most advantageous point, but they all seem to be gradually going in the right direction. HTZ in particular has done well. I bought three Put contracts. Since I was up over two hundred percent, I sold one contract, which more than recovered my initial investment. I've been letting the other two ride, and although there was a little pull back today, I'm still up over one hundred eighty percent.

"Your oil analysis makes great sense. I still need to read all the extra articles Flavious recently made available to us, but it looks like another lucrative opportunity. I'm looking forward to seeing how it unfolds. When Porter predicted the emergence of the Shale industry several years ago, one company you folks recommended was Petrohawk. I was unable to purchase it initially at your recommended price, but ended up some time later buying 100 shares for much less than your original buy up to price. As a result, I didn't stop out when everyone else did. Because of that, when Petrohawk was bought out, I still owned it and ended up selling at an almost ninety percent gain. Based on your current analysis, I'm confident several opportunities will arise that will dwarf that gain.

"The only time I've failed to make money since I first subscribed to your service a few years ago is when I failed to follow my trailing stops. In other words, my only substantive losses have been when I failed to follow one of your most fundamental teachings. An expensive lesson, but one I hope to never repeat. Thanks for all you folks do for your subscribers." – Paid-up subscriber Ricky V.

"Porter, thanks to you and your publications I will be going back to school for my Ph.D. My dissertation is already complete: 'A Case Study: $1 Trillion in Government Backed Student Loans You Don't Have to Repay – What Could Possibly Go Wrong?' – insert Caswell CV here – The End.

"In all seriousness though, I really enjoy the work you and your team do. Your analysis is insightful and based on facts. As someone who works in the energy industry, I appreciate that you understand the breadth and complexity of the industry which makes your analysis accurate and relevant. It's also good that you touch on the role technology plays in advancing the oil and gas industry as well as alternative forms of energy. I hate to pick on Ms. Caswell again, but most do not make the effort to understand the full picture and instead choose to believe misinformation and half truths (or things a previous President may have said)." – Paid-up subscriber R. Christian

Regards,

Justin Brill
Baltimore, Maryland
June 20, 2017