Starting to Look Like Bargains

 | May 28, 2014 | 3:30 PM EDT  | Comments
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Stock quotes in this article:

wwe

,

petm

For a long while, I've been an advocate of constantly studying the stock market, developing watch lists and watching stock prices for signals of an opportunity. After all, you use price to calculate return.

There have been some price moves lately that have caught my attention and worthy of deeper examination.

A couple of weeks ago, World Wrestling Entertainment (WWE) fell by nearly 50% in a single day. In fact, in less than two months, WWE shares plunged to around $11 from more than $30. A recent TV deal that WWE signed was worth a lot less than the stock market was expecting. More so, the launch of the WWE Network was expected to be the next big media splash. In fact, in less than 60 days, its network had nearly 500,000 subscribers. WWE began comparing itself to Netflix (NFLX), which has 50 million subscribers and counting.

Euphoria erupted around the shares. But then, when the company suggested that growing to a million subscribers would cause the company to lose $40 million in 2014, the party stopped. So, as we all know, when Mr. Market gets surprised, he reacts wildly.

At $11 a share, WWE is being valued at $830 million. The company has no leverage and about $60 million in net cash. The story here is that if the WWE network continues to in fact add subscribers, which can be monetized, WWE could start generating a lot of cash. The business model hasn't changed. Perhaps the growth curve has, but now you have a stock price that is one third of what it was last month. And while you wait, you pick up a 4.3% dividend yield.

PetSmart (PETM) shares tanked by more than 10% on a quarterly report that failed to please analysts. The shares trade for $55, a 52-week low, compared with $77 several months ago. Indeed it looks as if PetSmart's growth will slow down from prior expectations in 2014. But nearly 75% of Americans own pets today and the family pet is just that, family. The company has an enterprise value of $5.7 billion and profits have grown to $400 million in fiscal 2014 from $290 million in 2012. With very modest leverage, PETM generates a return on equity of more than 35%. While it may compete with grocery stores and retailers in some categories, PETM has really become the only pure pet retailer in the industry. If Mr. Market continues chipping away at shares because of lower expectations, the value could get very ripe for investors with a multi-year time horizon. 

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