Stock Interest List Update

Happy Memorial Day Weekend and thank you to all our Veterans out there, as well as the men and women currently serving in armed forces!

I have been very slow in updating the Stock Interest List following a recent spate of earnings releases. I will provide a brief recap and some adjustments to the list below. As you will see, these updates leave me with only one Long idea on the Long Interest list, so if you have any suggestions please post them.

PETS - reported 4Q08 and FY08 earnings on 5/12. Expected sales and EPS for 4Q were ahead of Street consensus and the stock raced up +/-15% on the day. One of the contributing factors to this was a high short interest, which means a lot of investors were shorting the name. So, when the Company reported decent results, a lot of the investors who were short the stock covered and drove the stock price up. At the price the stock reached intraday on 5/12, it looked way overvalued. I just don't think it is worth paying 17x earnings for a company who has no defensible advantage (moat) and a high net margin, which competitors could easily force down.
Also, earnings growth during the year was only about 10% based on lower interest income - hardly a growth stock.

PETS has subsequently sold off, like I thought it would, and the shares are up 0.73% since the original Interest List posting compared to the S&P, that is up 1.97%. I truly struggle with whether to keep it on the interest list or not at this point. However, there were some strange comments on the conference call about taking advantage of lower costs and buying in excess product at a discount from the suppliers, while also complaining that product costs were driving down gross margins - statements that seem to be in contradiciton. This led to the highest inventory level at PETS in the last 14 quarters. I wonder if these inventory levels will reflect more margin pressure in the near-term? As such, and combined with the second lowest trailing twelve month reorder growth in the last 11periods, I will keep PETS on the Short Interest List.

UNTD - this one is a little more simple than PETS. In brief, the earnings reported on 5/5 did not correspond to the limited Street consensus out there. But as hypothesized the cash generating ability and operating income growth opportunities were demonstrated in UNTD's results. As was originally posited in the first posting regarding UNTD, it was/is a misunderstood company. The stock price has risen 36.10% since the original posting compared to the S&P 500 increase of 2.00%. The Company still appears interesting but given the lower margin of safety and the inherent riskiness of its businesses to a slowdown in consumer spend, UNTD is being removed from the Long Interest List.

WFMI - reported what were widely considered strong 2Q results on 5/13. Most of the "strength" came from cost cutting. There was no real earnings growth. It was all on cost-cutting. WFMI has no real plans to grow going forward (like it has in the past), which is confirmed in talks to Street analysts. Therefore, I cannot justify paying 20x forward earnings for this stock. If there is a rollover in the broader market I do not seeing cost cutting stories holding high valuations like WFMI. The companies and stocks that will hold up in that type of market will be true growers - companies meaningfully growing their revenues and operating earnings from normal business operations. WFMI remains on the Short Interest List.

-2outof4