When the pandemic hit and the world went into quarantine, consumers had no choice but to buy goods online. For many this was a first — and now they’re hooked. They now know what the hoopla was all about. The e-tail revolution led by Amazon (NASDAQ:AMZN) crippled brick-and-mortar retailers. And shops like Chewy (NYSE:CHWY) will retain many of their new shoppers forever. Today I will recommit to the bullish thesis on Chewy stock like I did back in June.
After the last writeup, the stock rallied almost 70%. Unfortunately for the bulls, it didn’t hold long. September has not been kind to CHWY stock — it’s down about 12% this month. Now the bulls are trying to find footing, and therein lies the opportunity. Buy Chewy stock even though it is still 23% above the level from the prior bullish call. The August rally was so big that this drop merely presents the opportunity to rinse and repeat.
This setup suits traders and investors alike. Those who had missed the rally now have a chance at getting into a great stock at reasonable levels. More active traders have the chance at another swing trade to $64 per share.
Why It Makes Sense to Buy Chewy Stock on All Time Frames
The long-term thesis on this stock is simple. People much prefer the convenience of buying gigantic dog food bags without needing to lug them home. And the prices are competitive, so there is no dilemma there.
Therefore, demand for CHWY products and services should continue to grow exponentially even after Covid-19 fears abate. The stock might temporarily suffer a little, much like Zoom (NASDAQ:ZM) would, from good news on the vaccine front.
Eventually clients of Main Street will see the value of its services, and Wall Street will realize its value. Even though Chewy still loses money, its stock is cheap. The price-to-sales ratio is 3.7. Investors do not have much hopium baked into the stock now. They have realistic expectations — and that’s good because it helps it find support on tough market days. Management should be able to leverage the new traffic from the pandemic for years to come.
Timing Matters, Especially for Momentum Stocks
The problem trading Covid-19 stocks is the chase. Buying Chewy stock a month ago, at its highs, was fraught with danger. The experts love to talk up a stock when it’s hitting ridiculous levels. But very few of them are brave enough to recommend when it’s falling.
CHWY is now back to the neckline that served as the base for a 43% rally. On Monday, when markets were falling precipitously, it would have been a good idea to buy that dip. It had just crashed 31%, and if it was a buy at $72 then it is a better buy at $50.
They don’t bring bells at tops and bottoms, but I know two things for certain. Chewy stock at $74 per share on Sept. 2 was definitely not an obvious point of entry. Conversely Monday, when it seemed to be falling into an abyss, was a better starting point for investors. The zone between $45 and $50 per share is strong support regardless of the threat from the bears. CHWY spent five months fighting over these levels and the bulls won’t let them go easily.
Since there are still tremendous risks to the economy, all conviction in bullish stock thesis should have some doubt. Meaning investor should not take full-size positions all at once.
How to Mitigate the Short-Term Risk
Using the options market makes sense for Chewy because it would allow for a buffer. On Monday, investors could have sold the $43 Jan put and collected over $3 for it. They become immediately long the stock, yet they don’t need a rally to profit. As long as CHWY stock stays above the sold put, they keep the maximum gains. If it crashes along with the markets, the break-even for this trade was near $40 per share. This trade is still viable now even after the Tuesday bounce. Using options eliminates the need of timing the rallies.
Regardless of the method, This is a buy for a long term. There could be resistance near $60, but eventually they overcome it. The bulls can maintain a higher-low trend to attack the hurdles one by one. Red days will happen! What shouldn’t happen is investor panicking and mass hysteria. Don’t just listen to expert opinion — do your own research. The VIX is still too high so clearly markets are on edge. Therefore by default investors should be cautious and not have absolute conviction.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.