Many of the stocks that have the best long-term growth prospects are usually companies that are benefitting from secular growth trends and disrupting an entire industry. For example, we’ve seen strong performance in the market this year from companies that are at the forefront of e-commerce. The theory is that e-commerce has permanently changed the way that people shop, which means companies that already have established logistics and a recognizable brand have a leg-up on the competition and are set up to see continued growth for years to come.
Take Chewy (NYSE:CHWY) for example. It’s a company that is pioneering how people purchase products for their pets. The stock is up over 140% year-to-date and has been one of the big winners this year during the pandemic as people are staying home and spending more time with their furry friends. With the company’s “Chewy Blue Box Event” occurring this week shares are on the move and long-term investors might want to consider starting a position sooner rather than later. Let’s take a look at 3 reasons to buy Chewy stock now.
Largest Online Pet Foods and Supplies Platform
Chewy is a company that offers the largest online pet foods and supplies platform. Pet owners can simply log in to Chewy’s website, create an account, and instantly purchase things like food, grooming supplies, toys, and medicines for their animals. There are over 2,000 different brands for pet owners to choose from and the company has developed a lightning-fast fulfillment process thanks to 6.1 million square feet of warehouses. Although there are competitors like Amazon (NASDAQ:AMZN) that might cut into Chewy’s market share, the fact that the company has a strong grip on the online pet products market and has developed the logistics network to continue its growth should keep the company perched atop the online pet products throne for years to come.
It’s the leading pure-play online retailer for pet food and supplies in the United States, which is a huge market that is going to continue expanding as the years go by. If you want a better insight into why Chewy is such a compelling business, all it takes is one visit to a physical retailer of pet products to see why. Brick-and-mortar pet stores feature an outdated business model and are losing customers to Chewy quickly. This has to do with several competitive advantages that Chewy has. It offers discounted products thanks to economies of scale, a much larger selection of brands for shoppers to choose from, and the convenience of having heavy bags of pet food delivered to the pet owner’s doorsteps.
The Pet Industry has Huge Potential
Most people treat their pets like a part of the family. That means they will pay a premium for the best pet foods and supplies that will keep their loyal companions healthy and happy throughout their lifespans. When you take a look at some of the statistics related to the pet market, it’s easy to recognize the massive potential for a company like Chewy. The American Pet Products Association found that total spending for the U.S. pet industry in 2019 totaled $95.7 billion. This year, it estimates that spending will amount to $99 billion and that number might even be too conservative.
The pet foods and supplies industry typically averages a 4% compounded annual growth rate, which could mean huge earnings growth for this company going forward. The growth is being helped by rising pet ownership from younger generations that love to spend big on their furry friends. We know that millennials and Generation Z love to shop online, and since many of them are pet owners Chewy should continue seeing strong sales even after the pandemic is over.
Strong Earnings Growth
Chewy went public back in 2019 and the stock didn’t get going until the pandemic. However, thanks to the e-commerce bullishness, Chewy has rallied considerably since March and is up over 140% year-to-date. When you dive into the latest earnings report for Chewy, you start to understand why it warrants a premium share price. The Q2 earnings numbers confirmed that the company has an advantageous position in the pet industry and is benefitting from the e-commerce trend.
Q2 net sales for Chewy increased by 47% year-over-year to $1.7 billion while Adjusted EBITDA improved by 153% year-over-year. Despite these stellar figures, Chewy still reported a net loss of $32.8 million which is a reminder that the company is still in growth mode. It was interesting to see how shares performed after the earnings release, as shares tumbled over 10% in September. However, it seems that the selling was exaggerated as the stock has regained most of the September selloff and could have another run at all-time highs after a break of $65 per share.
Lots of Paws-itivity
The bottom line here is that Chewy’s earnings growth, its favorable positioning as the leader of online pet products, and the rapidly growing pet industry all support a bull case for this company going forward.
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7 Tech Stocks To Buy On Sale
This too shall pass. Those four words should be taped to the computer screen of every investor. If you own shares of the tech sector, you’ve seen your portfolio take quite a hit. Tech stocks were largely immune from the effects of the pandemic.
However, as investors are looking to rebalance their portfolios, tech stocks were obvious targets for some profit-taking. And at the end of the day, that’s what I believe the latest tech selloff amounts to. Stocks don’t move in one direction all the time. Sure, there may be some saber-rattling about breaking up big tech. But with an election in less than two months, nobody will have the political will to do anything.
That doesn’t mean that it’s all going to be smooth sailing. Sure, the Federal Reserve did its part by promising low-interest rates until the end of time (or at least through 2023 whatever comes first). But the rest of 2020 is likely to be volatile for stocks.
First, there’s still the novel coronavirus hanging around. It’s not going to simply disappear after election day. That will take some combination of a vaccine and/or therapeutic. And all the likely candidates seem to be getting farther away the deeper into clinical trials they get.
And we have an election. But we are not likely to know the winner of the election on election night. In fact, for those who remember the spectacle of “hanging chads”, this election could make that one look like amateur hour.
The bottom line is there will be uncertainty. But there are always gains to be found, particularly now that their stock price has come down a little bit. Here are seven tech stocks that you can look to add or increase a position in now that they’re trading at a discount.
View the "7 Tech Stocks To Buy On Sale".