Fido may be in trouble, which may open the door for speculators seeking cheap pet stocks to buy. As everyone knows, inflation has been a drag on the consumer economy. Still, pet-owning households have soldiered on, determined to sacrifice for the benefit of their four-legged family members.
However, how long can this situation last? That was the topic of the hour when CGTN America invited me on its Global Business broadcast to discuss pet economics. During my conversation with anchor Frances Kuo, I mentioned that while pet lovers continue to support their non-human buddies, the inflation rate for pet-related products and services runs approximately twice that of the “regular” commerce sector.
Unfortunately, we’re beginning to see signs of strain, with many pet owners delaying or dropping veterinary care. Also, insurance costs for both dogs and cats have soared, crimping the wallet. And that has naturally sparked red ink for pet stocks.
Still, for the contrarian gambler willing to absorb exceptionally high risks, the valuation could be too discounted to ignore. If so, these are the cheap pet stocks to wager on.
On paper, Freshpet (NASDAQ:FRPT) doesn’t seem like one of the cheap pet stocks under severe pressure. Since the start of the year, FRPT gained almost 11% of equity value. That’s not a remarkable performance but it’s nowhere near terrible. However, in the trailing six months, FRPT lost more than 16%. Further, investment data aggregator Gurufocus warns readers that it could be a value trap.
At a cursory glance of the financials, it’s difficult to not be a little hesitant. For example, the company’s trailing-year operating and net margins sit in negative territory. And while Freshpet rings up a three-year revenue growth rate of 23.5%, shares trade hands at 4.19X trailing-year revenue. Ideally, you’d like to see a bit more of a fundamental discount before moving in.
However, the fresh cat and dog food producer may be getting the nod from options traders. While FRPT’s implied volatility (IV) dynamics indicate that the smart money is hedging against severe downside risk, it’s also factoring in the possibility of robust upside moves.
Notably, analysts rate FRPT a consensus strong buy with a $91.09 price target, implying over 56% upside.
An online retailer of pet food and other pet-related products, Chewy (NYSE:CHWY) appears terribly risky. One of the worst-performing pet stocks, CHWY lost over 40% of equity value since the beginning of this year. Over the past five years, the security stumbled almost the same magnitude, 40%. So, it’s apparent that consumer pressures such as skyrocketing inflation has stymied the business.
It’s difficult to sugarcoat some of the poor financial stats. For example, net margin only comes in at 0.46%. Per Gurufocus, the company only enjoyed one year of profitability over the past decade. At the same time, it levers many positives. Specifically, it features a robust cash-to-debt ratio of 1.85X. As well, it enjoys a three-year revenue growth rate of 24.7%, above 86.35% of its peers.
On Friday, the last big block options trade was for 1,047 contracts sold of the Dec 15 ’23 15.00 Put. In other words, a floor might exist at the $15 strike price.
Analysts peg CHWY as a consensus moderate buy with a $34.50 target, projecting over 63% growth.
While one of the most relevant cheap pet stocks from a consumer awareness standpoint – go Padres! – Petco (NASDAQ:WOOF) hasn’t been able to leverage that attribute in the price chart. Since the beginning of the year, WOOF fell almost 59%. In the trailing one-year period, shares gave up a startling 63% of equity value. And it gets even worse the longer you extend the timeframe.
Put another way, WOOF appears a persistent falling knife. Therefore, it’s only appropriate for the most daring of gamblers. Even that, the financials present huge problems. For one thing, the company has only posted two years of profits over the past decade. Further, it carries too much debt. And an Altman Z-Score of 1.2 suggests an enterprise in distress.
Still, Petco does benefit from solid long-term revenue growth. Also, WOOF gained almost 12% last week. With plenty of bearish options wagers having expired, it’s possible that WOOF may have a clearer path forward.
It’s terribly risky but analysts rate WOOF a strong buy. Also, the average price target hits $7.14, implying over 87% upside.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.