Friday, August 26, 2005

The Capitalist Pug's stock picks

Humans are often surprised to hear that I consider myself a capitalist pug. "But Mugsy," they say, "aren't you bent on establishing a theocratic state that you will rule over with an iron paw?" Yes, it is true that I am working to set up an autonomous pug homeland in the American Southwest, with all residents subject to Sharia law and my own personal whims. But that doesn't mean I'm a communist or in any way anti-capitalist. Money is the lifeblood of revolution, after all. And so I would like to launch this occasional series to share my investing knowledge with the masses. I consider myself to be, for the most part, a value investor -- in the mold of Warren Buffett and Benjamin Graham. I also have a bit of a contrarian streak; I'm not afraid to buy when everybody else is heading for the exits. So when a growing, high-quality company hits a 52-week low, it catches my attention. It doesn't hurt that this is a company whose stores I am quite familiar with.

Shares of
PetsMart (PETM) dropped 13.5 percent on Thursday after the company reported disappointing second-quarter results and management lowered its guidance for fiscal 2005. PetsMart has produced excellent long-term results, and I believe this drop in the share price has created an excellent buying opportunity. Demographic trends favor continued growth for PetsMart, as more and more people experience the joys of pet ownership. The company has ample opportunity to gain market share, with plans to double its store base. Its price-to-earnings growth ratio of 1 and P/E of 20 are both below the industry average, though PetsMart is a superior company with an unparalleled selection of halaal rawhide. The dividend yield is a paltry 0.5 percent, but it has increased 200 percent over the last year. Long-term investors can benefit greatly by buying companies that steadily increase dividends. The decline in PetsMart's share price may not be over -- it's down over 30 percent this year -- and the company's troubles could continue in the short term. But I believe PetsMart is a solid long-term investment. I wouldn't hesitate to buy at under $26 a share.

Full disclosure -- The ayatollah does not own shares of PetsMart, but he is planning to break open his puggy bank.

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