Stock Interest List Update

2Q earnings season has been an interesting one so far. More companies than usual have exceeded analysts' earnings expectations, but that has not necessarily led to soaring share prices. They soared before the earnings reports in many cases and estimates had been reduced significantly across most companies and industries! Overall, I am still pessimistic on the consumer and the economy in general, but as always, think there are some interesting individual stock ideas out there.

I'm sorry I never put ANN on the Buy Interest List. At 2x EV/EBITDA the market was suggesting death, but it had a fair amount of net cash and a saveable brand. Add in a Goldman Sachs upgrade and it has been off to the races. Hopefully, we find more like it, and you offer up some possibilities!

SPTN - reported its 1Q09 last night. I don't think anything surprising came out of the call, but the stock was off almost 15% today, making it about flat from when it first went on the Buy Interest List. The company said that the next 12 to 18 months would be tough for the customer base (remember, Michigan grocery stores) and that the comparable store sales figure for the year would be down in the low single digit range.

Meanwhile trailing twelve month (TTM) return on invested capital was solid and Free Cash Flow (FCF) generation improved year-over-year. For 4.6x Enterprise Value to EBITDA (EV/EBITDA) and 8.0x earnings, I think Michigan going further into the toilet seems discounted into the share price. SPTN will remain on the Buy Interest List.

PETS - reported its 1Q09 on Monday and surprisingly it seemed to work through its inventory issue at the end of the year, as the Company said they would. Operating margin increased and cash flow improved.

Despite the model having no sustainable advantage and there existing several websites that have better prices on the same goods, PETS has maintained its P&L. New order growth dropped from double digit growth the last three quarters to 5% growth this quarter, but reorder growth remained pretty constant in the low teens.

I will give it one more quarter, but PETS is becoming a prime candidate for removal from the Short Interest List.

One more note, it does look as though 20% of the shares outstanding are shorted, which is fairly high, and can often make shorting painful if the fundamentals of the Company's business are still positive. A high percentage short can often lead to painful "short squeezes", when the people who are short have to buy shares (adding to the rise in price) because they no longer want to be short the stock.

-2outof4