I Sell Petsmart (PETM)

Yesterday I sold my Petsmart (PETM) stock. This is not because I think anything is wrong with the company, or that the stock is overvalued. When I bought PETM on October 8, 2009 [See I buy Petsmart] the price was $22.31 per share. I thought that grossly undervalued the company. Since Petsmart pays a dividend, I bought it for diversification against my technology-heavy portfolio, with a view to long term gains. For some reason PETM had not seen the stock price appreciation in 2009 that others had.

That changed after Q4 2009 results were reported. I was able to sell the stock for exactly $30.00 per share. That gave me 34.5% appreciation in a few months. I had less cash than I had wanted in my account; now I have cash for some other bargain.

In fact I bought a little bit more Dot Hill today, as it was having a fire sale after investors misinterpreted HILL Q4 results and plans for 2010. That is a more complicated story, and a riskier company, than Petsmart; I hope to write it up in the next few days.

I think small, independent investors like myself, who are good at research and analysis, usually do best with longer term investing. Since I would have been happy if PETM had appreciated 34.5% over a three year period, in a sense I did keep it for a long term.

The bargain basement is thinning out pretty fast these days. I am keeping my eye open for companies that I think will grow revenues and profits nicely over the next one to five years, but have low P/E ratios today. Mostly that will be small and medium capitalization stocks these days, but wait long enough and you will find that on occasion even large cap stocks are mispriced (both over and under) by institution investors and those crazy computer black box trading programs.

More data: www.petsmart.com
Petsmart Investor Relations

I Buy Petsmart (PETM)

Today I bought some Petsmart stock (PETM). This is well outside my fields of expertise, technology and biotechnology. It is the only stock I own outside these fields. But don't take this as a recommendation. I am looking for some diversification and I owned Petsmart in the past, so I did not need to to a lot of research to get up to speed on the company. I am not going to post analyst conference summaries on the stock to my web site, as I do with the technology companies I own or follow.

I originally bought Petsmart on August 5, 2005 at $25.76 per share. I sold it March 21, 2007, for $31.87 per share. Today I bought share for $22.31 per share. Petsmart currently pays a dividend of $0.10 per quarter or $0.40 per year. That works out to a 1.8% dividend at my buy price. According to NASDAQ, it has a trailing P/E ratio of 14.1, or earnings of 7% at my buy price.

Petsmart is a well-run company that has done pretty nicely during the recession compared to other retailers. Also, my wife and I got a puppy, Hugo, last year and I have watched how much of our normally tight-fisted household budget goes to pamper this pet.

The main risks I see for Petsmart are not unusual. There is competition in the pet supplies space, as in every other retail space. There is the danger of a double-dip recession. Also, Petsmart management already gave guidance for Q3 that is not fantastic.

But the main probability sequence is a retail sales recovery in 2010, so I expect to see a gradual upward trend in PETM revenues and then net income; hopefully even in dividends.

Keep diversified!

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.