The world has opened up to shopping online in a big way. Long are the days when Amazon (NASDAQ:AMZN) was trying to convince us that it’s safe. The practice is so ubiquitous now that a company like Alibaba (NYSE:BABA) can generate more than $60 billion in online sales in just one day. Current e-tailers like Chewy (NYSE:CHWY) can simply turn on the lights to get clients. CHWY stock of late has struggled, but today we will evaluate the opportunity.
First, let’s frame the level of struggle properly because it’s still up 150% in less than two years. It stumbled out of the gate in 2019 but then the novel coronavirus pandemic hit. While it was a human tragedy, that’s when things got awesome for online retailers. CHWY stock soared 480% in 12 months.
Alas for the bulls, it crested in February and corrected 35% from there. The good news is that they are forming a base at $75 per share. That is something that builds confidence for the next few months. If I am long Chewy already and haven’t capitulated then I should be patient. The action is in a relatively tight range between sellers at $92 and buyers above $75. The breach of either of those zones will carry momentum in that direction.
The plan then is to chase the breakout if the bulls prevail in the next few weeks. Alternatively, support should hold. If not, and if the sellers manage to break below $67, the fans should pounce on it. I have been bullish on this opportunity for a while and nothing has really changed except for the better.
CHWY Stock Is in Good Hands
The Chewy business is growing really fast, so management gets an A+ from me. The total revenues more than doubled since 2018. Even net income improved tremendously. They still lose money but that’s not important for now. They need to spend a lot to grow a lot. Just ask Amazon. The important thing is to not bleed cash profusely while doing it. In this case, they moved from a negative cash from operation to tripling from 2019 to now. Profits margins are increasing and debt ratios falling.
There is hardly a negative note to mention here, except for the stock price of late. Therein lies the opportunity, to find a gem that is not getting enough attention. The icing on this cake is the 4.8 price-to-sales. This is in line with AMZN so the owners of this stock are very realistic. This makes them strong hands and hard to disappoint.
Technically, the chart seems broken, but there are important lines to track here. The support below is solid because it has history. Pivot points this loud harbor buyer strength. In September and October, CHWY stock failed miserably going into it. Then in December, the bulls broke out in a 66% rally from about the same zone. Now they have successfully tested it for support for over a month. Odds are that if markets in general don’t correct that’s the CHWY base for the next rally.
Consider Different Methods
The fundamentals of a company matter. In this case, they are attractive enough to own the stock outright. The indices are at all time highs, which opens the door for hiccups. CHWY stock could fall in sympathy and to no fault of its own. Using options allows me to get long now and leave some room for error.
For example, buying stock outright risks $83 per share without any room for error. Instead, I can sell the CHWY May $75 put and collect $3 credit. Cash goes into my account so there is no out-of-pocket expense. In fact, the stock can fall to $72 per share and I could still break even. To win I don’t even need a rally. If CHWY stays above $75 then I would have created income from thin air.
Options get a bad wrap but mainly out of ignorance. Learning them allows investors to protect themselves by creating cushions. Consider the scenario if CHWY falls to $70 by late May. Someone who bought the shares outright today would have already lost 15%. Alternatively, the put seller would only be down $2 for where they owned it. Their breakeven base is $72 so the loss would only be -2.7%. It is also important to note that selling puts is only appropriate for investors who want to own shares. Else there can be complications.
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.