As I was cultivating a piece on lawn-care companies, I stumbled across a fundamentally misunderstood situation that warrants correction. If this were some tiny, obscure stock, I would let it slide, but Central Garden & Pet
Central has turned up in a lot of value screens, apparently prompting dozens of outperform calls in CAPS, not to mention a breathless buy recommendation out there in the blogosphere. As of this writing, the company is reportedly trading at a huge discount to book value following an apparent plummet in the share price in early February. However, the numbers presently reported by Yahoo! Finance and Motley Fool CAPS do not account for the issuance of a special 2-for-1 Class A stock dividend on Feb. 5. A glance at the three-month chart makes it appear that the company dropped on its quarterly earnings release, but that didn't come until two days later.
If you're not familiar with the concept of a stock dividend, it had the same effect as a stock split. There are three times the number of shares outstanding, and each one is priced at a third of the pre-dividend price. Central's market capitalization is still a touch above $1 billion. The company is still trading at a modest premium to book value, just like it was before the stock dividend. I'm not even going to get into the potential investment merit here, but this is not the fire-sale stock it appeared to be at first glance.
Consider this a gentle reminder that ratios like price/earnings and price/book are shorthand, and they don't tell the whole story. As a Foolish investor, these numbers are where your investment research may begin, but certainly not where it ends. If you merely gaze wide-eyed at the numbers as reported on one of various financial sites and pull the trigger then and there, you have no idea what you're actually buying. If you need a refresher on how to invest Foolishly, we have 13 handy steps for you.
Fool contributor Toby Shute probably uses the word "blogosphere" too readily. Kindly e-mail him if you object to that word entering the lexicon, or if you object to anything else he says, for that matter. Unlike a financial ratio, the Fool's disclosure policy does tell the whole story.