Thursday, August 23, 2012

Why I Own PETM

I own Petsmart (PETM) but I don't really follow it much these days.  I don't follow it because it has risen to 70 for a P/E of 24.  And it isn't a good value to me anymore.  Petsmart is a nationwide pet product retail chain.  PETM is not small, it has around 1300 stores.  Yet PETM can get such a high P/E because it has had phenomenal growth.

I got into investments of pet specialty stores back in 2005 with Petco.  Petco was (and is) the number two chain and I bought it because I wanted to get into the pet industry. The main reason is demographics, people in general have less children and more wealth. So pets are more and more pampered like children. Pet retail is a huge growth industry. And what could go wrong?  Well, in 2006, one year after I bought Petco, it  went private at a 33% gain.  Although 33% sounds great, I hated the idea of being forced to realize a gain. And that would leave only one public pet retailer: FETM.  So in 2007 I said what the heck, pet retail worked for me once, I'll try it again.  So, I bought some PETM. Today that position is up about 180% !  The following chart explains PETM's past growth and current valuation.

I would have sold it probably at 100% gain if not for capital gains taxes.  But as often happens the thought of capital gains taxes makes me hold longer.  It has worked out really well so far.

As for the future, I don't know what to do with PETM, I want to deploy my capital elsewhere. But I can only get away from capital gains taxes by cancelling the gains with all my available capital losses. And I really want to save those capital losses for other gains in a rainy day.

As a final side note, I will have a future post "Sins of Commission, Sins of Omission" where I discuss how I arrived at the aforementioned capital losses. This blog isn't just about how I have been making good investments.  I have had my share of bad ones too, all will get their full attention on this blog!

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