Chew On This Insider Buy

The market is back to being a mess. Last Friday’s stronger than expected inflation report put the wham-o on stocks. From 30+ years of experience, we’ve learned that when bad news is bad news for prices that the knife has likely more falling to do before the slide is over.

One of the possible signs that a downtrend is likely over is when stocks rally on bad news. In other words, bad news is good news for stocks. Obviously, Wall Street’s reaction to hot inflation says we are not there yet.

As a result, we’ll continue with the theme of identifying companies with insider buying as potential buy candidates when the downtrend pivots to a new uptrend.

Chewy is an e-commerce business in the United States. The company provides pet food and treats, pet supplies and pet medications, and other pet-health products, as well as pet services for dogs, cats, fish, birds, small pets, horses, and reptiles through its www.chewy.com retail website, as well as its mobile applications. It offers approximately 100,000 products from 3,000 partner brands.

Chewy.com Director James Star purchased 180,636 shares of the specialty retailer on June 6, 2022 at $27.71 for total investment north of $5 million. Star has a strong history of being on the right side of the trade. He started out as a buyer in June and September 2018, acquiring roughly $2 million of CHWY stock in a pair of transactions. His purchase prices were $22 in June 2019 and $23.94 in September 2019. (1)

Star turned seller in December 2020, unloading close to $4.8 million in stock at $85.06 and $99.45 per share. For that set of trades, the director practiced the adage of buying low and selling high.

According to Allied Market Research, “The global pet care market size is valued at $138.270 million in 2020, and is estimated to reach $269,497.5 million by 2030, registering a CAGR [compound annual growth rate] of 6.2% from  2021 to 2030.” (2)

That’s a healthy growth rate and means the industry would double in about 11.6 years. Pet Food Processing reports that online pet supplies sales are about 30% of the market in 2021 compared to 17% in 2017. (3)

Chewy.com is the number one pet supply brand of choice only behind titan online retailer Amazon. “According to Packaged Facts, among pet owners who report purchasing pet products online, 59% order from Amazon, 41% order from Chewy and 33% order from Walmart.” CHWY online presence dominates its brick-and-mortar competitors Petco and Petsmart. (4) (page down about halfway)

As we type, CHWY trades at $28.72 per share and has a one-year price target of $43.49. (5) Analysts don’t expect the e-retailer to make a profit this year or next but do forecast sales growth of 15.6% in fiscal 2023 (this year) and 15% next year. The consensus revenue estimate is $10.28 billion this year and $11.82 billion for fiscal year 2024.

Today, CHWY is valued at 1.14 times sales (P/S), which is slightly above its low of 1.12. Since its initial public offering (IPO) in June 2019, Chewy.com traded with average P/S ratio of 3.47. If the company hits Wall Street’s 2024 revenue target and continues to trade at its current P/S valuation, the stock would hit $123.15, a lot higher than where CHEWY trades today.

If we broaden out CHWY’s to the entire retail sector, we find an average P/S ratio of 0.9. If the pet supplies retailer traded at the wider sector’s average P/S ratio and meets 2024 consensus revenue target, the stock would be valued at $97.22 per share.

OUTLOOK: Chewy, Inc. (CHWY) appears to have some favorable upside in the next 18-24 months based on its and the retail sector’s average price to sales ratios and its consensus fiscal 2024 revenue forecast. Director James Star’s previous trading history suggests he has a sense of decent timing. Longer-term, the online pet supplies segment is poised for solid growth through 2030.

Investors with an average risk tolerance and a 18-24 month time horizon should add CHWY to their list of candidates to consider when the stock market stops falling.

 

1 – https://www.secform4.com/insider-trading/1260705.htm

2 – https://www.alliedmarketresearch.com/pet-care-market-A06512#:~:text=The%20global%20pet%20care%20market,impact%20on%20the%20market%20growth.

3 – https://www.petfoodprocessing.net/articles/14771-online-only-retailers-dominating-the-emerging-pet-e-commerce-market

4 – https://commonthreadco.com/blogs/coachs-corner/pet-industry-trends-growth-ecommerce-marketing#:~:text=This%20segment%20accounts%20for%20an,13%25%20in%20the%20previous%20year.

5 – https://finance.yahoo.com/quote/CHWY?p=CHWY&.tsrc=fin-srch