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Spokane, Washington  Est. May 19, 1883
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Motley Fool: Barking up the right tree

While competition in the pet care space is intense, Petco has a major position in the market.  (Courtesy Petco)
While competition in the pet care space is intense, Petco has a major position in the market. (Courtesy Petco)

Petco Health and Wellness (Nasdaq: WOOF) went public earlier this year, and there hasn’t been much enthusiasm surrounding the stock. However, for long-term investors, this could be a great opportunity to invest in an undervalued stock.

The pandemic has had many people, in search of extra companionship at home, adopting pets and spending money on them. In 2020, the pet industry posted a record $103.6 billion in sales, per the American Pet Products Association .

The APPA expects further growth ahead – in part because unlike typical consumer products with limited shelf lives, pets may require care for many years. For businesses selling pet supplies and offering veterinary services – like Petco – that means more recurring revenue.

In fiscal 2020, Petco reported revenue up 11% year over year, to $4.9 billion. On a cash basis, the business looks strong; it also reported that its free cash flow totaled $109.1 million, which was a big improvement from negative free cash flow in fiscal 2019.

If Petco can continue cashing in on an increase in pet care, its shares could prove to be a bargain for long-term investors. With a recent market value of just $7.2 billion, the stock is trading at a cheap price-to-sales ratio of just around 1. While competition in the pet care space is intense, Petco has a major position in the market.

Ask the Fool

Q: What’s “the Fed”? – A.T., Ely, Minnesota

A: Created in 1913, the Federal Reserve is America’s central bank, responsible for managing monetary policy to optimize employment, inflation and interest rates; monitoring and promoting the health and safety of U.S. financial institutions; and protecting consumers – among many other duties. Its Federal Reserve Board of governors is appointed by the president and confirmed by the Senate, and it’s accountable to Congress. The Fed encompasses 12 Federal Reserve banks across the country and the Federal Open Market Committee, which manages the nation’s money supply. You can learn more about the Fed at FederalReserve.gov.

Q: I know that Warren Buffett is famous for his educational and informative annual letters to shareholders. What other CEOs issue letters worth reading? – P.H., Baton Rouge, Louisiana

A: It’s a good idea to read the letters from CEOs of the companies in which you’re invested. Beyond that, some of the many other informative and often educational letters include those from Markel co-CEO Tom Gayner, Alleghany CEO Weston Hicks, Fairfax Financial Holdings CEO Prem Watsa, Cimpress CEO Robert Keane, Sykes Enterprises CEO Charles Sykes, Trupanion CEO Darryl Rawlings, and past letters from Amazon.com CEO Jeff Bezos, who is stepping down. BlackRock CEO Larry Fink’s annual letters to CEOs are also good.

JPMorgan Chase CEO Jamie Dimon’s letters are worth a read, too. And anyone who hasn’t been reading Warren Buffett’s letters can find all of them at BerkshireHathaway.com. Various studies, such as those by Rittenhouse Rankings, have linked candid CEO letters with companies that outperform. You may not understand some jargon or industry metrics in some good CEO letters, but you’ll likely walk away at least a little smarter.

My dumbest investment

My dumbest investment was buying shares of a company that I thought was going to get taken over. The market clearly was saying it was never going to happen, but I didn’t listen. Ugh. – P.L.W., Calgary

The Fool responds: There’s an old saying, advising investors to “buy on the rumor, sell on the news.” The thinking is that as a rumor spreads about a possible buyout of one company by another, excited investors snap up shares of the presumed acquisition target, sending its stock price up. Then, once the acquisition is announced, they can sell for a profit. It doesn’t always work out that way, though, as many forecasted happenings never happen. If you hear of a looming acquisition and the target stock is not moving, that could mean that the rumor isn’t very widespread – or that the possible acquisition hasn’t excited investors.

It may seem thrilling if it’s suddenly announced that a company you own shares of is being bought by another company, but that’s not always the best investing outcome. Companies are frequently bought out at a premium price, giving their stocks a big bump – perhaps 10%, 20% or even 30%. After that, though, shareholders may simply end up receiving some cash for their shares – or shares in a slower-growing company. They may end up wishing the acquired company could have been left to keep growing briskly on its own.

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