Extreme Speculators May Turn to Petco (WOOF) for Possibly Massive Gains

By Josh Enomoto

At a cursory glance, the broader pet products and services industry may seem a logical choice for finding recession-resistant prospects. True, companies like Petco Health and Wellness (NASDAQ:WOOF) are never fully immune to economic headwinds. However, America has shown a love for its four-legged friends, a love that sometimes exceeds that for human family members.

It’s not just empty rhetoric. According to the American Pet Products Association (APPA), total U.S. pet industry expenditure clocked in at a remarkable $136.8 billion last year. Despite the ongoing pressures of high inflation, as well as high borrowing costs, pet owners increased their total spend by nearly 11% against 2021’s tally of $123.6 billion.

Also, it’s worth pointing out that while other sectors saw a significant disruption in 2020 due to the Covid-19 pandemic, the APPA reported total pet industry sales of $108.9 billion that year, an expansion of 12.2% from 2019. Still, the persistent challenges that households face may crimp sector-wide demand.

I sat recently down with CGTN America anchor Frances Kuo to discuss the economics of dog ownership. During the televised interview, I mentioned that the inflation rate for pet-related expenditures ran at twice the rate for regular goods and services. Given such an unfavorably high baseline, it seems only a matter of time before pet owners have to make tough sacrifices.

Indeed, we’re already seeing pet owners either delay or drop critical care for their furry friends. That puts WOOF stock in a bind, evident in the near 61% decline in equity value since the January opener. Nevertheless, the options market may offer an extremely risky but simultaneously compelling opportunity.

Underperforming Chewy, Pet Care ETF

Looking purely at year-to-date performance, WOOF stock’s performance doesn’t even qualify as an also-ran, showing 62.4% in the red.

Once-meme stock Chewy (NYSE:CHWY) is down 44%. And the sector’s biggest exchange-traded fund, ProShares Pet Care ETF (BATS:PAWZ), is down 4.7%. That ETF holds CHWY among its top five stocks, at 8.3% weight. As for Petco stock, it’s further down the roster at a bit more than 2%.

Analysts seem to like the shares, with six current “buy” recommendations, one “overweight” call, and seven “holds” on the books.

WOOF Stock Offers a Terrifyingly Tempting Gambit

To be sure, anyone attempting to bet long on WOOF stock would be absorbing a massive risk profile. It’s not just about the 61% loss in the market which is certainly bad enough. Rather, a plethora of technical indicators imply more downside ahead. At the same time, the underlying nuances present a possible path to a recovery.

Looking at Fintel’s options flow screener – which exclusively targets big block trades likely made by institutions – it appears to reveal an exhaustion among bearish traders. For one thing, most of the major transactions have already expired and that potentially clears the digestive tract. After all, institutional traders have mostly been buying puts or selling calls, both carrying generally negative implications.

Second, one of the biggest bearish trades among institutional investors – the acquisition of 2,224 contracts of the Jan 19 ’24 7.50 Put – is no longer relevant. I say that because as of the latest data, the open interest for this put option is zero. Basically, the bearish speculators have already cashed out.

And because the price of the option is so high now because it’s deeply in the money (ITM), there’s little point in pouring back in. In fairness, some speculative bets at even lower strike prices exist but those appear to be filled exclusively by retail traders. 

In contrast, the institutional players don’t seem interested in squeezing more juice out of this lemon.

Third and most enticingly, WOOF stock features a short interest of 24.64% of its float. That’s quite high, meaning that a possibility of a short squeeze exists. And, again, institutional players don’t seem interested in driving down WOOF with even more out-the-money (OTM) puts.

Stated differently, the current bears of Petco stock are likely retail traders. With less capital and resources to work with, they’re more likely to be susceptible to a short-squeeze panic compared to an institutional player.

Enticing Fundamental Note to Consider

Lastly, the narrative for WOOF stock doesn’t just revolve around technical nuances and granularity. Rather, one major fundamental factor exists that arguably not many investors are paying attention to.

As multiple reports indicate, the Millennial age group represents the largest percentage of current pet owners. However, questions have always existed about the general fear of commitment among members of this generation. Back during the Great Recession, pet abandonment represented a massive crisis for animal advocacy groups.

At the time, many Millennials were children and they likely swore that they would never abandon their pets when they became pet-owning adults. Of course, talk is cheap – but it might not be so cheap with this age cohort.

Specifically, the Millennial divorce rate is lower than any other generation. To be fair, the time comparison is not perfect, with older groups having more time for things to go wrong in a relationship. But with the data we have, it implies that when young people commit, they’re in it for the long haul.

That’s a hidden catalyst for WOOF stock that deserves careful consideration.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. None of the above should be construed as investment or financial advice. Investing is inherently risky. Please perform your own due diligence.

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