Rob Luther's  Instablog

On October 20th, 2010 I wrote an article about PetMed's business (see article: here) and recommended to buy PetMed's stock and/or sell put option contracts to receive a premium while waiting for a better price point. On February 24th, 2011 I opened a long position in PetMed which was detailed in another article I wrote (see article: here). Since my initial purchase at a stock price of $14.57, PetMed's stock price has suffered tremendously hitting a low of $8.51 on October 3rd, 2011 (a loss on my initial investment of 41.6%).

While some of the price depreciation was warranted, I believed the negative sentiment was overdone and I trusted my fundamental analysis, which is why I doubled my initial position in June of 2011, and doubled it again in August of 2011 (the last purchase price being at $9.79). Unfortunately I did not have a large cash position at the time, so I was unable to grow my position further when PetMed hit its 52 week low of $8.51 in October of 2011. After all of the dollar cost averaging, my position in PetMed has an effective cost basis per share of $11.65, which as of today's closing price of $12.54, gives me a return of around 7.62% after transaction costs (excluding an effective 4.5% dividend yield).

PetMed reported revenue and EPS that exceeded Wall Street expectations on January 23rd, 2011, which provided some positive momentum for the stock price. This morning PetMed announced an increase in their quarterly dividend by 20%, from $0.125 to $0.15, which provided another boost to the stock price.

In my opinion (see my analysis at the link above) the stock price still seems to be a bit undervalued, irrespective of the shrinking margins, year over year income decrease, and the notion of increased competition, which was already priced into the Wall Street estimates, when PetMed exceeded them.

Anyone have any thoughts on what seems to continue to hold PetMed back other than the aforementioned areas?

Disclosure: I am long PETS.

Last Thursday, February 24, 2011 I opened a long position in PetMed Express (PETS) at $14.53 per share. Back on October 20th, 2010 I wrote a piece about PetMed's business (see article: here) and I recommended purchasing the stock or selling put options if the price went much lower. At the time the stock was priced at $15.44. If you took my advice at that time you could have realized approximately a 22% return if you sold your shares by December of 2010.

Since then, PETS has missed earnings estimates, which has beaten the stock down to levels that have once again become attractive from a valuation standpoint, which is why I opened a long position last week. So, the moral of the story is to have patience, because in this case a stock that was considered relatively attractive in October of 2010 is now far more attractive at the end of February, 2011.

Disclosure: I am long PETS.

On August 4th, 2010 I wrote an article (see article: here) about the clothing retailer Buckle Inc. (BKE). Through my analysis detailed in that article I was convinced that BKE was a solid company that was undergoing some negative market sentiment regarding their ability to maintain their growth rate and margins, a downgrade by Goldman Sachs, and some reported earnings short of Wall Street's expectations, which had depressed BKE's stock price. I noted that I was waiting for a slightly larger margin of safety in the form of a larger pull back in the stock before I initiated a position. Well, nine days after writing that article, BKE's stock had indeed pulled back further, and I opened a position in BKE at an average stock price of $25.63. In the weeks following my purchase, BKE's stock price drifted lower to about $23.00 per share (I have never been any good at picking the bottom, or the top for that matter in any individual stock, and this case was no exception). Determined that my analysis was correct and with the hope that other investors would eventually share my opinion, I held my position, monitored BKE's business, and waited it out.

As of this writing BKE's value has been recognized and I sold my share of Buckle two days ago on March 30, 2011 for $39.93 per share, equating to a 55.80% return on investment before transaction costs.* The next day the stock price pushed slightly higher, and as of this writing the stock has pulled back below my selling point. Like I said earlier, I can't seem to find, nor am I looking for, the top or bottom price of any individual stock. I invested in a company that had strong fundamentals, an undervalued stock price, and was having a tough time meeting high expectations. Once BKE's stock price exceeded the point at which I would be interested in purchasing more of the stock, and the value reflected in Buckle's stock price met my analysis, I sold.

The downside of this investment is that the value was realized in a shorter period of time than I would have liked, being that I only held onto the stock for 7.5 months, and therefore will incur a short term capital gains tax on my profit. That being said, a wise man once said you should never make investment decisions based on tax consequences alone. In sticking with my Keep it Simple Stupid (KISS) strategy (see article: here), I ignored the technical indicators, the complex algorithms, the market sentiment, outside noise, and just simply focused on value.

*The return on investment calculated does not include the onetime special dividend paid out last year, the regular dividend payments paid quarterly, and the call that I sold with a strike price of $40 with an expiration date of March 18th, as a way for me to collect a premium while waiting for the value to be recognized. The call wound up expiring, allowing me to collect a premium equating to a return of 2.25% on my BKE investment, assuming the value of my investment was priced at the strike price of $40 per share.