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TheStreet Open House

PetSmart Is a 'Heads You Win, Tails You Breakeven' Trade

Stocks in this article: PETM WMT TGT AMZN

NEW YORK (TheStreet) -- Specialty retailer PetSmart (PETM - Get Report) is a dividend-paying stock crushed after reporting slower-than-expected first-quarter growth earlier this week. The market is overreacting and I think the stock is a buy.

As a short-seller, I recognize a heavily shorted stock with increasing earnings per share and a growing dividend is no longer a short candidate if it falls below fair value.

PETM Chart

Short-sellers have called this one right, but they are also intensely crowded with over 17% of the float shorted. Following the price decline the tide has shifted, and short-sellers are planning their exit strategy.

At around $55.30, PetSmart shares are down 24% for the year to date.

On a typical earnings disappointment, it takes two or three days to fully discount the news and form a new support base. Because the stock market on any given day moves on emotion, it also has a strong tendency to overshoot on the way up, and back down again. It's the reason active traders will buy on the third day looking for the dead-cat bounce.

Petsmart is a Friday and Monday dead-cat bounce candidate for traders, but as I will illustrate, the short thesis is no longer valid based on the current and expected financial metrics. It's why I'm motivated to get long Petsmart at this current attractive level as a trade and for long-term dividend investors.

I posted a Real Money Pro trade alert for active traders including an option play with exact entry, profit target, and stop loss that you may want to consider for a trade right now.

Wall Street focused on declining same-store sales of 0.6%. Considering overall retail weakness and specifically in competitors Walmart (WMT) and Target (TGT), I believe the stock decline is a typical overreaction and the stock is a buy.

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