Can Williams-Sonoma Keep Cooking?

01/14/2010 11:00 am EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer’s Investment Research says the home-products retailer’s shares have come a long way, but there may be too many bears on the stock.

In a recent article in (“Look for Post-Holiday Blues at Williams-Sonoma,” January 5th, subscription required), analysts expressed their concerns that the shares of Williams-Sonoma (NYSE: WSM) have reached their peak valuation based on the company's fundamental performance. In fact, analysts believe the stock could fall by at least 15% from its current price.

"We think the company has done a great job of turning itself around," said David Magee, retail analyst at SunTrust Robinson Humphrey. "But the stock has priced in the good news."

[At Wednesday’s close above $22,] the security currently has a gaudy price-to-earnings ratio of just over 38x its fiscal 2010 earnings. "The stock is already discounting a return to peak profitability," Colin McGranahan, retail analyst at Sanford C. Bernstein, said in an interview. "We're neutral on the shares, because we don't think there's a lot of upside at this price."

However, profits are expected to grow robustly, as the economy continues to improve and the company continues to execute on things like margin improvement. For fiscal 2010, which ends this month, Williams-Sonoma is expected to report earnings of 56 cents a share.

The sentiment of the article is summed up nicely by McGranahan, who stated, "There's a lot of dreams reflected in this stock price."

Technically speaking, the shares of WSM rose more than 164% in 2009, and have tacked on another 6% since the beginning of 2010. The equity remains in a steady up trend along the support of its ascending ten-week moving average.

Meanwhile, short sellers have loaded up on bearish bets. The number of WSM shares sold short increased by 10% during the past month to 11.5 million. This accumulation of bearish bets accounts for more than 12% of the company's total float. Any unwinding of these positions could fuel a significant rally.

Wall Street is also giving the shares the cold shoulder, as 21 of the 25 analysts following WSM rate it a Hold or worse. Any upgrades from this group could result in fresh buying pressure.

Finally, we find WSM's Schaeffer's put/call open interest ratio (SOIR) of 0.57 at its lowest point of the year, with call options nearly doubling their put counterparts.

However, some of those call positions could be hedges against the heavy short positions the bears have opened up against the stock. In other words, options players may not actually be as optimistic as they appear.

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