Buy Chewy Stock on the Dip for 3 Major Reasons

Chewy (NYSE:CHWY) stock is on fire, rising over 150% from its March low to the recent high. With the stock’s recent dip though, investors should be looking for buying opportunities in CHWY stock — not selling opportunities.

chwy stock
Source: designs by Jack / Shutterstock.com

With the novel coronavirus wreaking havoc on the economy, most consumer-sensitive names have been hit. Chewy was among the casualties, but the selling didn’t last long. That’s as demand flew through the roof.

We’ve seen that play out in the stock price, and we’ve also seen that play out in the most recent quarterly report. Let’s look at three reasons to buy Chewy stock.

Buy CHWY Stock for Secular Growth

I really like Chewy stock for two main reasons: Pets and e-commerce. Both themes are a secular trend, which puts the stock in a prime position to benefit.

When people think of e-commerce, they think of companies like Amazon (NASDAQ:AMZN) and Shopify (NASDAQ:SHOP). But Chewy should be in the mix, too.

E-commerce is part of a broader trend we’re seeing across the board. Not only are old brick-and-mortar companies shifting to omni-channel operations — like Target (NYSE:TGT), Walmart (NYSE:WMT) and Costco (NASDAQ:COST), among others — but brands are increasingly leaning on it as well.

For instance, with the coronavirus forcing many stores to shut down, brands like Nike (NYSE:NKE) and Lululemon Athletica (NASDAQ:LULU) saw huge spikes in online sales.

The e-commerce trend has been in place for years now and will remain in place for years to come. We know that much based on Amazon alone. However, the other trend comes from our pets. Pet spending continues to increase at a steady pace. Have a look at the graphic below, which highlights this trend.

secular growth in pets expenditure
Click to Enlarge
Source: Chart courtesy of Statista, Source from APPA

You’ll notice that this trend has been in place for decades, not just years. This is exactly the type of thing investors should take notice of if they’re looking to buy Chewy stock.

The simple truth is, our society continues to spend more and more on our pets. Combined with online sales, Chewy stock is perfectly situated between two major secular trends.

Chewy Has Growth

Consensus estimates call for 37% revenue growth this year, followed by 21% growth in 2021. There’s little doubt that Covid-19 is helping to accelerate this year’s growth rate. However, with the “sticky” ecosystem that Chewy has and the vast selection it offers, one could argue that it should retain new customers in the future.

Provided that the company can deliver on this year’s growth estimates, perhaps estimates for 2021 are a bit conservative.

On the downside, Chewy is not yet profitable. However, its bottom line is trending in the right direction. Analysts expect 22% earnings growth this year for a loss of 49 cents per share. Covid-19 may be driving revenue higher, but it’s a negative for profit as costs go up. In fiscal 2022 (next year), analysts expect an acceleration up to 57% growth on a loss of just 21 cents per share.

Finally, free cash flow is moving in the right direction. In 2019, the company generated free cash outflow of $57.5 million, less than half of the prior year’s $120 million outflow. For the full year 2020, Chewy had just $2 million in outflow and is actually free cash flow positive for the trailing 12 months, at $38.4 million.

Trading Chewy Stock

Chart of Chewy stock
Click to Enlarge
Source: Chart courtesy of StockCharts.com

Last but not least, the technicals are attractive. Chewy stock has the fundamentals backing it up, along with not one but two secular growth trends at its back. Now, it has the fundamentals as well.

When I look at the charts, I see a few things. First, Chewy tends to trade up to resistance, then eventually break through it and use it as support. That’s bullish price action. Second, it continues to respect the 50-day moving average.

Below the 50-day and Chewy stock will also lose $45 support, potentially putting the $38 to $40 area in play. Over the 20-day moving average and $52 resistance is back in play. Over the current high at $52.77 and CHWY stock can break out further.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


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