As I type, the FTSE 250 is down almost 14% year-to-date. Some of the stocks in the index have fared far worse.
On a positive note, this gives long-term Foolish investors like me an opportunity to load up on quality growth shares while they’re on sale.
Fall overdone?
I think one example of the above is retailer Pets At Home (LSE: PETS). As I type, the company’s value has fallen over a third in 2022 alone. Is such a fall justified?
Well, there are headwinds for sure. Rising costs are hitting the vast majority of listed companies. Adding to the gloomy outlook, consumer confidence is now lower than it was during the 2008 financial crisis.
The departure of long-standing and highly-rated CEO Peter Pritchard is something else that may be specifically troubling Pets at Home investors. Some may also be concerned by the fact that his replacement, Lyssa McGowan, arrives from media and telecommunications giant Sky UK – a very different kind of business.
So why am I bullish on the stock? There are a few reasons.
Long-term growth
First, spending on pets is non-discretionary. More than ever, pets are considered full members of the family. The ongoing humanisation also pushes owners to spend more on their furry companions. I reckon this makes the FTSE 250 member a surprisingly defensive retail option.
Another thing I like about Pets at Home is that it’s rapidly evolved into a ‘one-stop shop’ for everything an owner might need. In addition to stocking all the usual products at its 455-strong estate, there are its veterinary (Pets4Vets) and grooming (Groom Room) services. It’s also got a VIP loyalty scheme and offers insurance. Importantly, Pets at Home has a very decent online business too.
The long-term growth trend of pet ownership should be considered as well. This was given a massive boost as a result of the pandemic. And while rising prices have brought home the full costs of owning a pet, we need to remember that the inflationary environment is temporary. Moreover, working from home is likely here to stay, making the mid-morning dog walk far more doable.
Reasonably priced
Then there’s the valuation. At 13 times forecast FY23 earnings, stock in Pets isn’t screamingly expensive. In fact, the five-year average P/E is 15.
It’s also worth mentioning the forecast yield of 3.9%. By comparison, the FTSE 250 index as a whole brings in 2.4% right now. No, these cash returns are never guaranteed. However, Pet’s payout is likely to be twice covered by profit. This makes its dividend stream look pretty robust.
FTSE 250 growth stock to buy
All things considered, I remain a fan of Pets for Home and consider the pretty awful recent performance of the shares an opportunity to start building a position. This is not to say I expect a recovery to be immediate. General market sentiment could easily get worse before it gets better.
More optimistically, I have no concerns over the full-year results, due 25 May. The company already suggested that annual profit would be at the top end of market expectations last November. Even if the numbers have been revised since then, I doubt we’re looking at a serious reversal of fortunes.
