4 Pet Stocks to Beat the Recession

PetSmart Is Thriving, But Don’t Jump in Yet

If you have a furry friend at home, chances are you’ve been to PetSmart (PETM). The retail giant
has cornered the pet market, with more than 1,137 stores in the United States and Canada, 152 in-store PetsHotels boarding facilities and Doggie Day
Camps, not to mention serving as the leading online provider of pet supplies and information.

First-quarter revenue increased 9% to $1.3 billion, and net income grew 12% to $46 million. All told, PETM has ascended 26% in 2009, thanks to an
increasing number of stores and a focus on more profitable lines, including orthopedic beds and pet cookbooks.

PetSmart is due to report Q2 earnings Wednesday, August 19, after the market closes. The current consensus of the 15 Wall Street analysts who follow
the stock is for earnings of 29 cents per share. I actually expect a bit higher from PetSmart, probably 30 cents per share or more.

Why am I expecting a slight earnings surprise? In May, the company said to expect second-quarter earnings in a range of 26 cents to 30 cents per
share. Companies typically like to low-ball these estimates so they can later “surprise” investors with good news. That tactic is as common on Wall
Street as pinstripe suits.

Also, PetSmart recently increased its dividend from three cents per share to 10 cents per share. That’s an increase of 233%. I doubt the board would
approve such a big increase if the company wasn’t doing well.

We should also remember that PetSmart has a nice history of beating Wall Street’s expectations — PETM has now met or beaten earnings for nine straight
quarters.

Still, I give PetSmart an overall C rating, which signifies a Hold. If you already own PETM, I don’t recommend selling it. However, if you’re looking
to buy the stock, I don’t suggest jumping in just yet. While PetSmart’s financial stats, like sales and earnings growth, rate well, I’m concerned
about the stock’s quantitative weakness, meaning its price and volatility trends. The shares are basically where they were in late-March, even though
the overall market is much higher. This lack of relative strength is troubling, and until we see improvement here, I suggest you don’t make any new
purchases of PETM.

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