Buying a stock that has fallen in value and is still dropping is one thing. Buying a growth share that has fallen but has now started to move back higher is another matter. The latter is sometimes a better option for investors to consider, as green shoots are already starting to emerge. Here’s one FTSE 250 stock that I’ve spotted that fits into this category.
Problems in the recent past
I’m talking about Pets at Home Group (LSE:PETS). Today (26 February), the stock is up 6.5%, helping to erase a chunk of the 21% fall over the past year.
Back in the middle of January, the stock hit its lowest level in five years. There are a few key reasons for the underperformance, especially in the past two years. During the pandemic, there was a surge in pet adoptions and general pet ownership. The business benefited from this, with higher sales of pet-related products and services. Yet since then, there has been a market adjustment, with a decline in pet ownership growth.
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The company also bad press late last year due to an investigation from the UK Competition and Markets Authority. It’s still investigating pricing practices in the veterinary sector, including those of Pets at Home. We’ll have to see what happens in the future with the outcome, but it has already negatively impacted the company image.
Why things have changed
In the past month, the stock has started to rally. Of course, this might just be a short-term move that could fade away. Yet there are signs that a larger-scale comeback is on the cards.
One reason for the change in sentiment came following reports that private equity firm BC Partners might be preparing a takeover bid. As bizarre as it sounds, this speculation arose after the registration of companies with ‘pug’ in their names, sharing an address with BC Partners. Nothing has been confirmed from either side, but investors have reacted positively to the potential acquisition rumours. Given the low current valuation, it doesn’t surprise me that potential buyers could be looming in the background.
I’m not saying to consider buying the stock based on a buyout. But instead it goes to show that clearly some feel the company is undervalued.
Another factor was the quarterly trading statement that came out at the end of January. It detailed how consumer revenue was up by 2.3% versus the same period last year, with an impressive 27% jump in the percentage of revenue that came from consumer subscriptions. It also maintained the full-year profit guidance, which likely provided some relief for investors.
The bottom line
I think the growth stock has put the worst days behind it. Of course, the regulatory investigation remains an ongoing risk. Yet, based on the change in sentiment over the past few weeks, I believe it’s a stock for investors to consider right now.
