Why Options Volume for PetMed Express (PETS) Implies a High-Risk Opportunity

On surface level, investors practically have every reason to doubt pet medications and supplies specialist PetMed Express (PETS). Though tied to a fundamentally relevant industry, PETS stock failed to demonstrate in recent years its viability for stakeholders. For example, since the January opener, PETS stumbled nearly 14%. In the past 365 days, it’s down almost 30%.

Drill a little deeper and once again, PetMed appears an incredibly risky and vulnerable enterprise. Earlier this year, the company released its earnings report for the quarter ended December 2022, which failed to meet expectations. Worryingly, top-line sales have been fading since fiscal year 2021, practically pushing investors to the exits.

Nevertheless, recent rumblings in the derivatives arena suggests that speculators see a possible upside opportunity in PETS stock. It’s a horribly risky proposition, to be sure. Nevertheless, market gamblers may be interested in taking a second look.

PETS Stock Frustrates Shareholders Yet Inspires Some Hope

If market participants simply assessed the earnings picture, PETS stock would seem an easy idea to dump. According to Zacks Equity Research, PetMed posted quarterly earnings of 2 cents per share, missing the consensus target of 21 cents. This compares unfavorably to earnings per share of 21 cents in the year-ago quarter.

Tellingly, the investment resource mentioned that over the last four quarters, PetMed surpassed EPS estimates just once. On the revenue front, the company posted $58.87 million in the top line, missing the consensus estimate by a wide margin of 7.59%. One year ago, PetMed rang up sales of $60.72 million. Again, the pet medication specialist only beat sales estimates just once in the last four quarters.

Adding to the woes, last month, the Motley Fool mentioned in late March that Morgan Stanley analyst Erin Wright lowered her price target on PETS stock, in part mentioning that data shows veterinary visits have declined slightly so far this year.

However, not everything about PETS stock has been pessimistic. Following the close of the April 28 session, PetMed represented a key highlight in Barchart’s screener for unusual stock options volume. Specifically, total volume reached 17,817 contracts against an open interest reading of 9,034. Further, the delta between the Friday session volume and the one-month average volume came out to 1,690.65%.

Looking deeper into the details, call volume hit 17,799 contracts against put volume of only 18. Therefore, the pairing yielded a put/call volume ratio of only 0.001, which on paper significantly favors the bulls.

Millennials Might Save PetMed But It’s Risky

Although a common meme is that Americans love their pets, it would be more appropriate to specify that millennials in particular have a fondness for their four-legged companions. It’s possible that this attachment to furry creatures may eventually represent a lift for PETS stock.

In March, I mentioned that while broader pet industry data supports optimism in the sector, the Great Recession and the tidal waves that it created forced many people to abandon their pets. Circumstances got so dire that animal advocacy groups admonished pet owners to hold on to the bitter end. By logical deduction, millennials – which don’t exactly have the wealth of their baby boomer parents – may do the same should another recession materialize.

Nevertheless, I offered a contrarian thought: “If you think about it, most millennials were still in their schooling years when the Great Recession broke out. They watched their parents suffer from job losses, with many incurring the devastation of losing their homes.” Therefore, not wanting to put their four-legged family members through the same trauma, millennials might break the cycle of abandonment.

Frankly, no one should buy PETS stock solely on the back of this possible catalyst. However, recent data from the American Pet Products Association provides some more food for thought. In 2022, total sales for the U.S. pet industry hit $136.8 billion, noticeably higher from 2021’s tally of $123.6 billion.

Moreover, sales associated with supplies, live animals and over-the-counter medicine amounted to $31.5 billion. Veterinary care and product sales saw $35.9 billion being rung up. Theoretically, this positive backdrop may help PETS stock in the long run.

Risky But Intriguing

Ultimately, PETS stock is a high-risk, high-reward venture. According to the Barchart Technical Opinion indicator, PETS rates as a 100% sell. It doesn’t get much more bearish than that. As well, analysts peg shares as a consensus moderate sell, breaking down as one hold and one strong sell.

Nevertheless, PETS stock did drop over 55% of market value in the trailing five years. For those willing to catch falling knives, PetMed could be interesting. For anyone else, you may want to watch from the sidelines.

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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.