I am selling out of my PetSmart (NASDAQ:PETM) position this morning as shorts cover on the news of shareholder activism.
JANA Partners took a 9.9% stake in the company, but PetSmart has a poison pill that severely limits activists' ability to do anything without the Board.
Here are some relevant notes from PetSmart's 10-K:
I took a position in Whole Foods (NASDAQ:WFM) yesterday as I view the company as a market leader with pricing power and easily visible earnings growth.
We have implemented some anti-takeover provisions that may prevent or delay an acquisition of us that may not be beneficial to our stockholders.
Our restated certificate of incorporation, as amended, and bylaws include provisions that may delay, defer or prevent a change in management or control that our stockholders may not believe is in their best interests. These provisions include:
• The ability of our Board of Directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock in one or more series with rights, obligations, and preferences determined by the Board of Directors;
• No right of stockholders to call special meetings of stockholders;
• No right of stockholders to act by written consent;
• Certain advance notice procedures for nominating candidates for election to the Board of Directors; and
• No right to cumulative voting.
In addition, our restated certificate of incorporation requires a 66 2/3% vote of stockholders to:
• Alter or amend our bylaws;
• Remove a director without cause; or
• Alter, amend, or repeal certain provisions of our restated certificate of incorporation.
We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, and the application of Section 203 could delay or prevent an acquisition of PetSmart.
Traditional "growth" investors are out of the stock as same-store-sales growth has slowed, but the "value" investors are still waiting for a lower P/E.
If WFM executes well, it will get 10% earnings growth from the store footprint expanding from 365 to 500 stores over the next three years, with approximately 5% additional growth coming from improved same-store sales. So, if management can execute and meet the lowered expectations, earnings should grow at about a 15% clip. This should result in bringing the P/E down, making the stock more attractive to "value" investors seeking cheap stocks. Meanwhile, growth investors will appreciate improved earnings momentum which should help boost the P/E. I consider this a longer-term position with a fairly balanced risk/reward profile.
Finally, I am looking into National Oilwell Varco (NYSE:NOV), as the company has spun off its low margin distribution business. Investors are expecting margin expansion to drive a higher growth rate and P/E multiple. I just don't see it. Orders in NOV's largest division declined 30% in 1Q, and margins are declining in all four business segments.
Note: Values do not sum to total because of intersegment sales & eliminations.
In addition, the business is driven by demand for new rig builds and capital expenditures of Exploration & Development (E&P) companies, and both appear to be peaking.
I love the company's business and market position, but after five years of 0% interest rates and excellent execution by NOV, this is what it looks like when end market demand begins to roll over.
I'm going to stay on the sidelines on this one.
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