The quarantine crisis caused a huge dip in the stock market, however, there were a group of stocks that benefited from the lock down. The highest profile one is Amazon (NASDAQ:AMZN), but stocks like Chewy (NYSE:CHWY) also exploded higher after the initial drop. CHWY stock rallied 150% from the March lows as part of the chosen few Covid-19 stocks that investors are buying in droves.
The action taken since management reported earnings recently has been negative, but this won’t last. In June the stock fell fast and it has given back about 15%. It’s still up 56% in 2020, so this does not change the overall story.
Many new users will retain the habit of shopping at Chewy going forward. There is no doubt that the convenience of clicking a button and receiving the goods is addictive. For example, those who buy dog food in bulk like me now can enjoy the convenience of not lugging the huge bags. Chewy is a great alternative to Costco (NASDAQ:COST) for me because those trips are a hassle. I have to stand in line to get in, observe mask rules and interaction regulations while walking around the store. My solution is to shop a lot less frequently at COST.
CHWY Stock Will Continue to Benefit From the Virus Fears Long-Term
This is upside for companies like Chewy because I am not alone. Millions more pet owners are thinking and doing the same. Therefore the dips in CHWY stock are buying opportunities, but for now levels do matter.
As it falls into $44 per share it should find support. This is an area that served as the base for the last breakout, and now they are merely testing it for footing. The bulls need these corrections in order to build a better chart. Rallies that go on too long become frothy and vulnerable to giant dips. Giving back a little bit at a time like this is healthier. There is support around $45 per share but it’s okay for it to lose even more and not change anything.
The bulls are still in charge of this stock for as long as they maintain the higher-low trend. Consequently, there is little reason to short the stock, so the bears cannot chase it too hard. Sure, they can complain about the fact that it loses money, but in reality it’s cheap.
The CHWY stock price is only 3.9 times its current full year sales. This is not a lot of hopium so it doesn’t have a lot of fat to lose. Compare this with other Covid-19 stocks like Zoom Video (NASDAQ:ZM), which sells at over a 100 times its full-year sales.
Fundamentals Matter and Chewy Is Solid
Chewy is fundamentally sound and technically in the hands of a bullish Wall Street, so investors should buy the dips. This week is binary because of a very important jobs report on Thursday. There is extrinsic risk because traders will hate it if we get bad data. But from its own story, management seems to be doing what it needs to succeed in the long run.
If I am long CHWY and it falls to $40 per share that would not scare me. In fact, it would probably be an opportunity to add to my longs. If I’m looking to start new positions I favor using the options markets. For example, I can sell the $32 October puts and collect $2 per contract. The worst that can happen there is that I buy the shares at a 25% discount from current price.
Furthermore, my break even point would be near $32 per share. Trading options allows me to implement a bullish thesis and leave a lot of room for error. Compare that to buying the shares now and potentially suffering losses just because markets drop over a bad jobs report.
The macro-economic conditions are terrible, but the Federal Reserve and other central banks are committed to growth at all costs. The risk is that something changes that fact, especially if inflation suddenly resurfaces from all this money-printing. Then the assumption of aggressive monetary easing would disappear overnight.
The FED has two mandates: to create a job, but more importantly, to preserve inflation. In times that are as bifurcated as these, investor sentiment has to be kept in check because it’s easy to get wrapped up in the FOMO.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.