Since the start of the year, Petco has already lost more than 15% of its value. Over the past five years, WOOF stock plunged roughly 90%. Just when you think a technical floor has been secured, that the equity couldn’t possibly fall any further, WOOF ends up proving you wrong. As such, I’m not terribly confident ahead of the company’s fourth-quarter earnings report.

By the print, Wall Street analysts are looking for earnings per share of 1 cent on revenue of $1.51 billion. In the year-ago quarter, Petco posted a loss per share of 5 cents on revenue of $1.55 billion, missing on both the top and bottom lines. What’s going to bother a lot of experts is the erosion in the headline growth number, especially amid a weakening consumer economy and rising competition.

Still, there will be plenty of speculators who will look at WOOF stock as an extreme value play, especially with a subterranean price-to-sales multiple of 0.11 and a forward earnings multiple of less than 8. Despite the tempting offer, though, the smart money remains unconvinced.

Volatility Skew Reveals the Smart Money’s Posture Toward WOOF Stock

While Petco stock may appear to be cheap, that term can be a tricky one. What we don’t want is for a cheap security to become even cheaper after we buy it. However, that’s the concern that’s being signaled by the smart money, at least according to the volatility skew.

Definitionally, the volatility skew is a screener that identifies implied volatility (IV) — or a stock’s potential range of motion — across the strike price spectrum of a given options chain. Basically, the tool showcases the surface-area distortion of volatility space, allowing retail traders to better understand how the smart money is structuring its risk profile.

In the case of the next upcoming weekly options chain (expiring March 13), the skew is relatively flat around the spot price. This profile suggests a lack of urgency in mitigating directional risk. Where there is a curvature spike occurs at the edges (specifically the left-hand side). Here, the structuring points to mitigation against tail risk.

Also, you’ll notice that the skew toward the right-hand side (toward higher strikes) is relatively muted. Essentially, smart money traders are refusing to position for upside convexity. In the case of the March 13 expiration date, the philosophy is making sure you don’t lose the game rather than running up the score.

It’s a similar situation (but on a greater scale) for options chains further down the line, such as the April 17 (monthly) expiration date. Here, put IV on the left-hand side soars to about 436%, whereas call IV on the right-hand side peaks at 212.2%. Again, the priority is to ensure against tail risk rather than to seek upside convexity.

For me, this risk structuring represents a major warning. We’re talking about a really cheap stock here (being last priced at $2.38 a pop). Even with the potential to make gobs of money on the contrarian side of the trade, the smart money is still firmly in a defensive shell.

Quantitative Picture Fills in the Rest of the Gap for Petco Stock

Enumerative induction, or the use of past analogs to help frame a probabilistic path forward, has its limitations. It’s a form of pattern recognition. If you happen to be on a hot streak, you might be tempted to continue betting on this streak. However, it’s important to realize that the future is not necessarily compelled by the past.

That being said, enumerative induction is probably the best mechanism for understanding the trading tendencies of public securities. Regarding Petco stock, the main concern about betting on the underlying company’s upcoming Q4 earnings report is the security’s negative bias. Using enumerative induction, we can calculate that WOOF’s median 10-week return would land between approximately $2 and $2.50, with probability density peaking at around $2.30.

The problem? As I mentioned earlier, the last closing price of WOOF stock was $2.38. Statistically speaking, then, if you were to hold WOOF for a period of about two months, you’d be looking at a loss most of the time of about 3.4%.

Given the poor exceedance ratio (how likely it would be for WOOF stock to rise above spot), you would only be expected to be profitable about one-third of the time betting on WOOF at scale.

Now, the bullish argument from the quantitative side is that we’re not just approaching Petco stock randomly. Instead, in the last 10 weeks, WOOF printed only three up weeks, leading to an overall downward slope. Given that there’s so much bearishness baked into this market structure, surely the bulls will help move the stock higher?

Technically, the answer is yes, it does. However, we’re talking about minuscule changes. Essentially, the forward distribution under 3-7-D conditions would allow WOOF stock to reach around $2.53 under the best of circumstances. The downside risk would still remain around $2 (or slightly worse).

Over the full breadth of the next 10 weeks, the exceedance ratio between the baseline and conditional frameworks is little changed. That’s why the smart money isn’t gung-ho on WOOF stock. It sees Petco as a value trap, and it’s really hard to argue against it.

Rationality Trumps Narratives

I’m a really big proponent of the pet care market overall. Again, Americans love their furry friends, and that’s not going to change anytime soon. I also previously liked the idea of WOOF stock being a value play. However, that was before the complete meltdown of this security.

I’m just afraid that there’s not much growth here. Whether you look at this trade fundamentally, technically or quantitatively, the picture continues to look poor. As such, I would consider something like a straight put option, such as the $2 put expiring Jan. 15, 2027.

Otherwise, I regrettably believe Petco is a case of good money chasing after bad.

Even a stock like that of Chewy Inc. (NYSE: CHWY) is only up about 1.9% year-to-date. That’s despite year-over-year growth in revenue and earnings. One reason for that is a price-to-earnings (P/E) ratio of around 98x. That’s pricing in a lot of future growth that investors don’t want to pay for, no matter how much they love their pets. 

But CHWY stock is only one example of pet stocks you can buy. Here are three names that analysts believe are moving higher, which means it could pay to be contrarian as 2025 comes to an end.  

Pet Stocks to Buy: Zoetis  

Zoetis Inc. (NYSE: ZTS) is the world’s leading animal health company. If you’re a pet owner, there’s a good chance your pet has received medicine or vaccines that are made by Zoetis. 

That said, as is the case with investing in any biotech company, investing in Zoetis is about the company’s “Multi-Year Disruptive Innovation Roadmap” that showcases a pipeline of medicines that are expected to be approved in the next five years.  

The bad news is that ZTS stock is down about 21% in 2025. But there are many reasons why investors should be optimistic. First, the stock is trading at around 21x earnings, which makes it fairly valued with the S&P 500. It’s also trading at a discount to its historical average.  

Second, analysts are forecasting over 11% in earnings growth in the next 12 months. And analysts give ZTS stock a price target of $178.89, which is a gain of 39% from its price on November 26. Plus, the stock pays a modest dividend. And with a 33% payout ratio; it’s a secure dividend that the company has increased for 14 consecutive years.  

Pet Stocks to Buy: Trupanion 

Trupanion Inc. (NASDAQ: TRUP) is one of the leading pet insurance companies. You could call it the right stock for the right time. In 2025, the global pet insurance market is expected to have a market value of $18.32 billion. And that’s expected to grow at a compound annual growth rate (CAGR) of 17.9% through 2030.  

Investors might have concerns about the TRUP stock valuation, which sits at around 135x as of November 26. That said, the company has been posting strong YoY earnings growth, a trend that analysts expect to continue with over 61% EPS growth in the next 12 months.  

A key driver of this growth is that Trupanion’s investments in advanced technologies, such as data analytics and direct payment software is yielding efficiencies that could mean expanding operating margins. And the company’s price-to-sales (P/S) and price-to-book (P/B) ratios are below their historic averages. 

That should give you more confidence when looking at the analysts’ consensus price target of $54, which is a 53% increase from the TRUP stock price on November 26.  

Pet Stocks to Buy: Petco 

Small-cap stocks remain out of favor with investors, but if you’re looking at pet stocks, Petco Health and Wellness Co., Inc. (NASDAQ: WOOF) is worth a close look. The company is a cross between Chewy and Zoetis with a portfolio of products focused on your pet’s health and well-being. 

WOOF stock trades as a penny stock with a price of $3.50 as of this writing. The price reflects the fact that the company has very little revenue and has only strung together two consecutive profitable quarters. 

However, that’s where the story may be getting more attractive. The stock’s P/S and P/B ratios are below their historic averages, and analysts give the stock a consensus price target of $3.93, which is a 14% gain from its price on November 26. More importantly, several analysts have been raising their price targets above consensus.  

Penny stocks come with intrinsic risks, but when you see a stock with solid fundamentals backed by analyst support, the speculation may be worth the risk.  

The Last Word on Pet Stocks 

Loving your pet and loving pet stocks are different things. However, the former does support the case for the latter. Pet ownership is on the rise and if population trends continue in their current direction, that percentage will only increase. 

That means that investing in pet stocks isn’t a case of if, but when. These are three stocks that allow you to build a position slowly, and profit over time.