Thursday, January 11, 2007

Petsmart Poodles and Wolves

The fact that the markets in a particular stock are only technically in equilibrium is easy to observe, economic fundamentalism to the contrary.

Some time in the last 24 hours demigod Jim Kramer said to buy Petsmart (PETM) and a bunch of people must have because over 1.7 million shares changed hands today and the closing price was up $1.14 per share to $31.36, a rise of 3.77%. The market capitalization of the stock shot up $159 million.

Now does anybody really think that the fundamental value of the company changed $159 million in 24 hours? Maybe if some fundamental news came out. But this was a comment by a commentator on a TV show. The same is true of most upgrades and downgrades from brokerage houses. They often site trends or ideas that were publicly known well before the changes in ratings.

But I bought Petsmart (PETM) back on 4/15/2005 when it was at $26.60 per share. At the time I realized all my stocks were either software or hardware; I was looking for diversification. I know a little bit about the retail trade, plus anyone can take a trip to the mall and see how stores appear to be doing. The closest Petsmart is a 2 hour drive from my house, but then the closest stores of most national chains are as distant. I had shopped at Petsmart, I liked their strategy of building new stores, and I liked the price of the stock. But I never expected a big runup. You have to buy into a company when it is smaller, usually, to get that. I bought three retail stocks, using the same criteria.

Is Petsmart fairly valued at $31.36? To me it looks within the range. It is still adding stores, but at some point the pet-superstore market will be saturated. Rival Petco is also still opening stores, and they are way bigger than the older Petcos. PETM's trailing price/earnings ratio is 24.89, which is pretty bullish. Forward PE is 19.24, which is more reasonable. The holiday quarter's results will be the lynchpin of true value. Did people pamper their pets? Were costs kept under control? If Jim Cramer is right and this is a turnaround, wouldn't it have been nice to have figured that out when the price of the stock was lower? It has been as low as $22.07 in the past 52 weeks. Why was it worth $22.07 then but $31.36 today?

As far as I can tell, not that much has changed. Petsmart is well managed. Their stores look like they are staffed with people who care about your pets. That was true long before I bought the stock.

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