Putting PETS Down

They say you can’t teach an old dog new tricks. Well, two-time SmartGuyStocks pick PetMedExpress (Nasdaq: PETS) seems to have one impressive trick down pat: beating earnings expectations, as it again bested analysts’ guesses this week for the fourth quarter in a row, growing sales 11% and profit 39%.

But there’s another trick that PETS can’t seem to learn- sustained stock price appreciation. Despite a long history of top and bottom line growth, a quick glance at PETS' chart shows that it just can’t seem to remain in the market’s favor. Sure, it jumps after its predictably great earnings, but then it either seems to trade in a range or slowly trend back down.

So with the stock up over 20% in the last two weeks on the back of strong earnings and a shaky market rally, it's time to cash out for now and take our gains. Advertising inventory will tighten up in the second half of the year with record dollars being spent on the upcoming election, and PETS could find margins slightly squeezed with increasing marketing costs.

We still stick to our original thesis that has proven true at each PETS quarterly report: pet medications are a growth market, and PETS will benefit. PETS has three secular trends working in its favor:

1. Pets are becoming a more integrated part of the modern family.

2. Pharmaceutical companies are pouring more money into new drug breakthroughs.

3. People are becoming increasingly comfortable ordering all sorts of products, including medications, over the internet.

So while we reluctantly put PETS to sleep, it's only because of the risk/reward benefit at this point. If the stock drifts back down to ~11, which it almost certainly will unless we see a true bull market, we will again be buyers.

Disclosure: SmartGuyAB no longer owns shares of PETS.

Comments

[JamesD:]

At some point, the company WILL be taken seriously by investors. Quarter-over-quarter growth may not do the trick, but year-over year growth certainly grabs the attention of analysts and portfolio and fund managers. If they hit on all cylinders for one more quarter, PETS will graduate from "speculative" and start appearing on lists of "growth" stocks.

2008 Jun 05 05:40 PM