Chewy Starts Crawling Out of the Doghouse
After rising as a pandemic star, CHWY is out-barking Petco.
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We all love to spend time with our pets. During the pandemic, spending on pets exploded, as humans got closer to their furry friends. One of the beneficiaries of this ramp in spending was pet e-commerce retailer Chewy CHWY .
Chewy's stock was just a pup when the pandemic hit, with its initial public offering occurring in June of 2019. The stock debuted at $36. By February of 2021, boosted by heavy spending on pets during the pandemic, shares of Chewy had tripled.
Since then, Chewy's been in the doghouse. Shares have fallen by more than 80% from their February 2021 highs.
Many investors seem to have forgotten about Chewy, but it's time to start paying attention again. Earlier this week, Jeffries analyst Kaumil Gajrawala initiated coverage of the stock with a buy rating and a target of $27. According to Gajrawala, pet owners are opting for "higher quality food, treats, and supplies."
Technically, Chewy reached a three-month high earlier this week, after the stock successfully broke out of a double bottom pattern (black curved lines). That bullish formation projects the stock to the $28 area, where the stock will encounter its next major obstacle, Chewy's 200-day moving average (red).
Charts by TradeStation
Beyond that moving average, Chewy's next major obstacle is a band of resistance stretching from $36 to $41 (shaded light blue). A move to the lower part of that band would represent a gain of over 50% from Wednesday's closing price.
Over the past three weeks, volume has picked up, a sign that institutions may be buying (shaded yellow). This week's breakout was foreshadowed by a MACD (moving average convergence divergence) buy signal, which occurred on Dec. 11 (arrow).
While shares of Chewy are showing improvement, the same can't be said of competitor Petco Health and Wellness WOOF .
Shares of Petco, which has physical stores in addition to its online presence, have lost 69% of their value this year. Unlike Chewy, Petco is showing no sign of a rebound.
Instead, Petco's chart reveals a persistent downtrend that has caused the stock to fall below $3. Petco trades below its 50-day (blue) and 200-day (red) moving averages, and its MACD indicator recently flashed a sell signal (arrow).
Just two weeks ago, Chewy reduced guidance for the January quarter, and for the full year. Chewy's positive price action since then could mean that the bad news is out, and the stock has bottomed.
Based on Chewy's chart, along with the stock's positive reaction despite negative news, I'm initiating a long position with a price target of $36.
At the time of publication, Ponsi was long CHWY.
