Activist Investor’s Push May Lead to a Double-Digit Rally in This Retailer

Just before traders packed up for the long holiday weekend, hedge fund Jana Partners revealed in an SEC filing that it now owns a 9.9% stake in PetSmart (NASDAQ: PETM). The stock jumped 12.5% on a massive spike in volume.

The positive news flow combined with the technically sound picture on the stock’s charts now sets up a solid bullish trading opportunity.

A 13D filing revealed Barry Rosenstein’s Jana Partners to be the company’s single largest shareholder, and noted that the activist firm is pushing for a sale of the troubled pet superstore operator.

The timing of the announcement — right before a long holiday weekend when ranks at trading desks were thin — is debatable, as it could have resulted in a bigger move in the stock than would have otherwise been possible. But it’s important to keep the bigger picture in mind.

Activist investors, particularly when they take a meaningful stake in a company, can often be a trader’s best friend. With the arrival of this new supportive player, there’s a good chance of limiting the stock’s near-term downside and keeping upside momentum alive.

Whether it’s Carl Icahn or Barry Rosenstein, when an activist investor puts his money where his mouth is, i.e., buys a stake in a company in order to force changes, he is hoping for further appreciation or some sort of special dividend payment, both of which are supportive for the stock’s price.

While each situation is different, I find that many traders approach these activist investor moves with skepticism, always trying to sniff out an alternate motive rather than seeing it for what it is. Basically, at the very least, it’s a virtual put option in place, limiting the stock’s downside.

Following Jana Partners’ filing, PetSmart released a statement saying that it is open to communications with its shareholders and values their constructive input.

So, with a new major activist player arriving on the scene, management not (yet) putting up a major fight against any potential changes or a sale, and a good-looking chart, PETM appears to be setting up for a continued move higher in coming weeks and months.

On the weekly chart stretching back to the late 2008 lows, note that before jumping in recent weeks, PETM found good support at its long-term uptrend line. Additionally, last week’s rally left a big bullish weekly bar behind on the chart.

On the daily chart below, we see PETM dropped around 25% from the start of the year to its earnings release in late May. Through a technical lens, this then left the stock overextended on the downside, i.e., near-term oversold, and led to a snapback rally.

The rally in recent weeks, and particularly Thursday’s big gain, which can thus far be labeled as a mean-reversion move, has brought the stock back up to its 200-day simple moving average. This moving average currently coincides with the diagonal resistance line dating back to the October 2013 top, marking a clearly defined line in the sand.

A push back above this confluence line of resistance, and preferably above Thursday’s opening print, would be a sign for traders to hop on for further upside momentum.

Recommended Trade Setup:

– Buy PETM at the market price
– Set stop-loss at $ 65
– Set initial price target at $ 76 for a potential 10% gain in 5-10 weeks