Chewy Is Barking Up the Right Tree
Wednesday's move came on extraordinarily high volume, an indication that institutional investors are active in the stock.
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Don’t you just hate it when you ask your dog to sit up, and he rolls over instead?
That’s what happened after I recommended shares of online pet retailer Chewy CHWY in December. After a promising late-year rally, Chewy was back in the doghouse.
That changed after this week’s earnings report. Not only did Chewy report strong first-quarter earnings and revenue, the company also announced a $500 million stock buyback plan. As a result, shares of Chewy jumped by over 27% on Wednesday, climbing to their highest level since early January.
The move came on extraordinarily high volume (arrow), an indication that institutional investors are active in the stock. Wednesday’s turnover of 66.5 million was the second-highest ever recorded for the stock. The highest was 69.67 million, recorded on June 14, 2019, the first day the company was publicly traded.
The move boosted Chewy above its 200-day moving average (red) for the first time since July. That moving average rests at 19.08. The stock is well above its 50-day moving average, currently located at 16.34.
Zooming out to the weekly chart, we see Chewy breaking a long-term bearish trendline (blue dotted line) that has been intact since early 2021. If Chewy can recover just a fraction of the losses suffered over the past three years, it could prove to be a winner.
Chewy is one of the beneficiaries of an increase in pet adoptions. According to Chewy CEO Sumit Singh, data from rescue centers and shelters was favorable, as a positive balance between adoption and relinquishment occurred for the first time since 2022.
At issue was a wave of adoptions that occured during the early stages of the pandemic. Covid-19 pushed demand for pet adoption forward, and when that demand waned, companies like Chewy and Petco WOOF saw a decrease in demand for their products and services.
Some investors may object to this stock’s valuation metrics, and that’s understandable. By any measure — price to earnings, price to sales, PEG ratio — Chewy is a richly valued stock.
While concerns about Chewy’s valuation are valid, it’s important to note that this isn’t a value stock. Chewy is a speculative growth name, so it’s not a proper component for a value portfolio.
At the time of publication, Ponsi was long CHWY.
