Petco has become another case study on why we tend to avoid IPOs for the first 2 years after listing. There area few instances where we break that rule, but when we do our position size is generally a tiny fraction of our portfolio. Petco has been trading on the NASDAQ for almost 2 years 9 months and the price chart spins an ugly tail:
The indicative IPO price range was $14 - $16 per share, but high demand allowed the organisers to set a higher IPO price of $18 price. Petco jumped out of the gates on listing date to reach a high of $31.08, eventually closing at $29.40 to rack up an impressive 63% gain. This was the highest the stock ever reached to this date. Enthusiasm for a pet supply and wellness business had been "exuberant" because we experienced a year of ongoing shelter-in-place and working from home. Adopting pet companions had jumped to peak rates
during the early phase of the pandemic and the flow on effect of this would be higher demand for pet supplies and veterinary services for years to come. Pet supplies and veterinary services also tends to be defensive in nature, resistant to economic cycles. You'll still need to buy pet food, your canine and felines still need their annual vaccinations and you still need to see a vet when they get sick.
This was the third time Petco became a listed company. Previous listings were in 1994 and 2002. We usually view this as a red flag. On the other hand, there was a good chance that Petco isn't the same business as it was back then. Usually when companies delist and go private under the stewardship of private equity, there'll be significant restructuring going on. Fat will be cut, strategic direction will pivot if necessary and new upper management will be ushered in. But you have to believe whenever private equity seeks to re-list a business, they're doing it at the most opportune time to attract the highest of prices. They would have planned it at least one or two years in advance, so there's going to be plenty of window dressing going on. At least with the Petco IPO, CVC Capital Partners and Canada Pension Plan Investment Board (CPPIB) were retaining their ownership stake. At a glance, it would seem the IPO was an effort to alleviate Petco's high debt load.
Petco recently came across our technical analysis screens because of its crashing price and potential support at $5.00. We've not done any real fundamental analysis on this business and we're still a little hesitant to commit the 15 - 20 hours of due diligence we normally do on an individual stock. There's always a legitimate reason why a stock falls from grace like this. Now that we're getting much older, our time is much more precious. We're no longer in the game of overturning as many rocks as possible in the hope of uncovering a gem lol. We'd rather buy business that have already won and evidence shows they're likely to continue to win.
Petco is a stock I would might consider trading if I see a sustainable bounce from here. I suspect that won't happen until we get some positive guidance from the business. If the fundamentals of the business start to really look up, we might commit the 15 - 20 hours of due diligence to find out if this business is worthy of a long-term hold.
If you're a private retail investor, always keep in mind the self-interest of private equity institutions when they list a business. They're not doing it as a gesture of goodwill to enrich the pockets of "mom and pop" investors, they're doing it to solely enrich their own. If they're selling out completely, you can guarantee they've window dressed the business as best they could (cost cutting to the bone to boost margins, running down inventory by stuffing the sales channels etc). If they're retaining partial or full ownership, assume their interest is to reduce their risk exposure by sharing a lot of that business risk with you. If it was such a great business, they'd probably keep it for themselves. If the business was hungry for capital to expand, they'd be more likely to find a way to raise that capital while retaining close to 100% ownership. It's possible they're trying to unlock capital because they see better opportunities, but that's not a stunning endorsement of the IPO either. Your survival in the stock market as stock picker relies on you keeping a healthy degree of skepticism. That's a good trait in this game.