Editor's note: Formerly, Chris Schumacher's short trading ideas were available only to subscribers to TheStreet.com's Short Advisor. Now these picks are being offered to RealMoney.com and TheStreet.com readers.
PetMed Express ( PETS) is a nationwide pet pharmacy, selling direct-to-consumer pet medications and supplies. It competes with companies such as PetSmart ( PETM) and Petco, which are more traditional pet-supply retailers. 2006 was not a stellar year for PetMed's stock-price performance. The loss of more than 50% of its value from January to July last year sparked what appears to be bottom-fishing accumulation during the September-to-December period. (Bottom-fishing refers to market players looking for short-term trades in stocks with dramatically lower prices, but who do not have a perspective on the company's longer-term outlook.) The 40%-plus increase from the September low of $9.50 to the December high at $14 has pulled PetMed's stock price out of the doldrums. However, it has continued to behave poorly since the triple-top formation that confirmed strong resistance on Jan. 16 of this year. After PetMed announced flat earnings this past week, the stock's strong movement lower wasn't met by many buyers. The current price action suggests that buyers are not willing to chase new highs, but rather only want to build positions on stronger retracements lower. Given that the shares are trading near the $12 level -- and the next major support is much further down at $9.50 -- there is $2.50 in risk for $2 in reward should buyers look to purchase this stock with expectations for a move back to resistance at $14. This is not a positive risk-reward scenario, and one that I expect would keep bulls on the defensive. The strong rise in volume recently as price declined also shows a lack of faith in PetMed's stock price. Typically, a stock that exhibits strength would have declining sell-side volume on a pullback.
| PetMed Express (PETS) -- Daily |
Therefore, there is a higher probability of additional downside in this stock in the coming months. The ideal setup for this short trade would be to get an entry at $12.80 with a stop at $14.25. This offers $1.45 in risk. Note, however, that if the share price closes under $11.25 without first offering an entry, this trade setup is no longer valid. The first profit target would be placed at $11.35 to satisfy the 1-to-1 reward/risk ratio. Partial or full profits could be taken there. If partial profits are taken, the stop should be lowered to $13 and the final profit target would then be placed at the September low of $9.50. Shares of PetMed closed at $11.85 Monday.