This Stock’s Pullback May Be Your Best Chance to Buy

Chewy (NYSE:CHWY) stock is down more than 20% since the beginning of the month, and the company announced a stock offering that was below the market price. Does this mean the run in Chewy stock is over?

Not by a long shot.

While I think that Chewy’s C-suite could have set a higher price for its public offering announced Sept. 16, I’m still bullish on the online pet supply retailer.

Chewy stock is better than the mid-$50s where it’s currently trading. I see Chewy headed back to the $70s soon.

And I’m not the only one.

A Look at Chewy Stock

Chewy had its initial public offering in 2019 and for the first few months, this stock was a disappointment. Chewy shares fell to less than $23 as of last November.

Then came the novel coronavirus. While that tanked the broader stock market in a big way in March, companies with an e-commerce lane took off as interest in online shopping exploded.

Online sales were up 42% year-over-year in August, proving that even after brick-and-mortar stores reopen, consumers are enjoying the convenience of e-commerce.

Face it: the e-commerce trend has arrived, and companies like Chewy will continue to be the main beneficiaries.

People who were shut up in their home during the Covid-19 pandemic had nobody to hang out with except their families and their furry companions.

Pet adoptions have been up since the beginning of the pandemic.

Is it any surprise that people started spending more on their pets during the pandemic? And that Chewy, which offers everything from food to pet beds and toys, was a major recipient of that?

The Price Target for CHWY Stock

Chewy announced a public offering on Sept. 16 of 5.1 million shares, priced $55.25. At the time, that was 1.6% less than the current stock price.

Does that mean the stock’s worth only $55 and Chewy lacks any upside potential? Not at all.

RBC Capital analyst Mark Mahaney reiterated his “outperform” rating for Chewy and raised his price target from $62 to $74. He noted Chewy’s accelerating revenue growth and record high gross margins.

That price would more than make up for the dip that Chewy has seen so far this month. It represents a tidy profit of nearly 40% for investors taking a position now.

Remember, Chewy enjoyed a strong second quarter. The company reported revenue of $1.7 billion, which was better than analysts’ expectations of $1.69 billion.

As a relatively new public company that is growing quickly, investors have to expect quarterly losses right now while the company scales its business. Even then, Chewy did better than expected. Analysts had expected losses to be 16 cents per share, but Chewy managed to post an EPS loss of only 8 cents.

A year ago, Chewy reported earnings of $1.15 billion and losses per share of 21 cents, so the company is certainly on the right track.

The Bottom Line

As I pointed out recently, spending on pets is about as “recession-proof” as discretionary spending can get. People are more likely to cut spending on themselves before they think about cutting back on Fido and Fluffy.

Remember, the American Pets Product Association says the U.S. pet industry was worth $95.7 billion in 2019, which is a huge increase from the $48.3 billion it was worth just a decade ago. People are spending nearly $37 billion just on pet food and treats.

Chewy’s public offering from last week, combined with short-term weakness seen this month in tech stocks, is artificially holding Chewy stock lower than what it’s worth.

I’m still bullish on Chewy and see this pullback as nothing more than an opportunity to get a high-growth name in your portfolio at a great discount.

CHWY stock continues to have an “A” rating in my Portfolio Grader.

— Louis Navellier

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Source: Investor Place