WOOF Stock Price Down 8% – is now a good time to Buy WOOF Stock?

The price of Petco Health and Wellness Company (WOOF) stock is hitting the skids this morning as it is dropping almost 8% in early stock trading action at $26 per share only a day after the stock went up 17.9% on the back of increased interest from retail traders from the popular Reddit messaging board WallStreetBets (WSB).

Almost 43 million shares of WOOF exchanged hands yesterday, this being the second-highest daily trading volumes for the stock since its initial public offering (IPO) as comments started to pile on the popular forum about the stock’s appeal.

The underlying bullish thesis for WOOF is that the stock has been heavily shorted, as short interest before yesterday’s uptick was almost 36% according to data from FinViz. With daily trading volumes for the stock averaging around 1 to 2 million shares, it would take short sellers around 10 to 20 days to cover their positions without affecting the price.

As it has happened with other issues such as GameStop (GME), Blackberry (BB), and AMC Entertainment (AMC), increased options buying prompted a gamma squeeze that raised the price of the stock as brokers were forced to hedge their exposure to these out-of-the-money derivatives by panic buying the underlying asset.

Meanwhile, the high percentage of short interest possibly catalyzed an even stronger jump as those who borrowed the stock had to quickly cover their positions to avoid severe losses – which can only be done by buying back WOOF.

However, as it has happened on other occasions as well, traders may not be waiting too long to dump their WOOF holdings as reflected by this morning’s downtick, possibly as those who bought before yesterday are dumping their positions for a sizable profit.

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WOOF Stock – fundamental analysis

Petco Health and Wellness Company, the company that trades under the ticker WOOF, is a mid-sized retailer of pet supplies with over 1,500 stores in the United States, Mexico, and Puerto Rico with sales of more than $5 billion a year.

The company has been growing its top-line steadily in the past few years, moving from $4.39 billion in 2019 to $4.9 billion by the end of its 2021 fiscal year.

During that same period, the firm has been trimming its net losses from $414 million to $26 million but debt appears to be a concern as Petco has $2.7 billion in long-term commitments on assets of around $3 billion – excluding goodwill and other intangibles.

Meanwhile, the company barely covered its interest charges last year while it covered roughly 50% of those in the preceding periods. This situation increases the risk of insolvency for the firm, while cash reserves were not too large either as they stood at $111 million by the end of the 2021 fiscal year.

Last year, the firm raised as much as $936 million from its share offering. A portion of those funds were used to cover the firm’s debt commitments but solvency remains a concern unless the company manages to take advantage of this temporary spike in the share price to raise more money via an equity offering to deleverage its balance sheet.

On the other hand, analysts estimate that Petco should become profitable by the end of this fiscal year, with GAAP earnings per share forecasted to land at $0.52 per share, which results in a price-to-earnings (P/E) multiple of 50 for the firm.

This valuation multiple is way too high for a company whose mid-term solvency is fairly questionable while these profitability estimates are quite optimistic based on the firm’s historical performance.

WOOF Stock – technical analysis

The implied volatility for WOOF options has been increasing steadily since late May while it has now jumped to 146.38%, which means that it would be very expensive to buy options at the moment – even out-of-the-money ones.

The chart above shows that the price action for WOOF has gone parabolic. This means that significant volatility can be expected for the stock in the near future.

As for upside potential, it is fairly interesting that the consensus price target for WOOF shares is currently standing at $28.4 – 10% higher than today’s price – while some analysts have even gone further than that to assign the firm a 12-month price target of $40 per share.

Meanwhile, according to data from Seeking Alpha, 6 out of the 10 analysts currently covering the stock are bullish about its mid-term performance, which could result in some residual upside potential even after yesterday’s surge.

Additionally, data from meme stock tracker Swaggy Stocks indicates that interest and sentiment toward WOOF are quite positive, with the stock amassing more than 12% of the comments on the WSB forum while sentiment is very positive. This could support the continuation of this current positive momentum as, to some extent, there is a fundamental case to be made about WOOF at $40 per share.

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