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Chewy Inc(CHWY-N)

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A Bull Market Could Be Here: 3 Reasons to Buy Chewy Stock

Motley Fool - Sun Oct 1, 2023

Last month wasn't a particularly great one for the market. All told, the S&P 500 lost 4% of its value in September, upending a budding rebound effort in the process.

It's far too soon, however, to say the bigger-picture rally in place since October of last year still isn't the groundwork for a new bull market. It may well be. The S&P 500's earnings are growing again, after all, and are expected to continue doing so through next year.

If this is indeed the underpinning for long-term bullishness, all stocks stand to benefit. Some stocks stand to benefit more than others, though. Online pet supply store Chewy(NYSE: CHWY) is one of these names. Three bullish arguments stand out among the rest.

1. People are still pet-crazy

It's almost become cliché to point out that most pet owners love their fur babies more than they love other people. Yet, it's true all the same.

It's also a powerful dynamic for the pet industry to leverage.

The numbers: The American Pet Products Association reports the average dog owner in the United States shelled out $1,480 feeding and pampering their pooch last year, while cat parents spent an average of $902. Total pet spending was up more than 10%. Recent results from a separate survey performed by LendEDU further indicate that 45% of the nation's pet parents spend at least as much, if not more, on their critter's healthcare as they do on their own. A similar survey by ValuePenguin suggests more than three-fourths of U.S. residents are willing to go into debt to save their pet's life.

Connect the dots. While the total percentage of pet-owning households actually fell from 70% the year before to 66% last year, that decline merely brings the proportion back to pre-pandemic norms. This market remains plenty resilient, as evidenced by last year's total uptick in pet spending.

2. Its e-commerce focus makes it efficient and increasingly marketable

Older consumers may recall the rapid expansion of off-mall brick-and-mortar retailing between the late 1980s and the early 2000s. Every conceivable sort of store was being established at an incredible pace, often practically on top of one another. Pet supply stores were no exception to this trend.

In retrospect, we can look back and acknowledge this strategy was far too aggressive, committing companies to leases that were too expensive in locations that were too close to rival retailers. The advent of online shopping only exacerbated these headaches linked to the operation of too many physical stores.

Photograph of a pet owner teaching their dog a trick.

Image source: Getty Images.

Chewy's sidestepping this challenge, though. See, it's an e-commerce-only store built from the ground up to handle online orders of pet supplies ranging from food to toys to prescriptions. It doesn't have to cover ever-growing expenses that only apply to brick-and-mortar locales. On a per-sales-dollar basis, it's cheaper simply to manage warehouses and fulfillment operations.

And this is no small matter.

Just as they have for most other categories of consumer goods, pet owners are increasingly going online to make their pet-based purchases. Consumer research company Packaged Facts estimates that -- despite the post-pandemic reopening of brick-and-mortar consumerism that was underway at the time -- online pet-product sales grew from 30% of 2020's total U.S. market to 36% of the nation's total pet business last year.

This still only scratches the surface of the opportunity, however. Packaged Facts believes e-commerce will account for 45% of the United States' pet supply business as soon as 2026, as consumers increasingly appreciate this option's convenience -- and, often, its lower prices.

3. The stock's a (relatively) cheap short-squeeze candidate

Last but certainly not least, anyone keeping tabs on Chewy shares will likely know it's been a phenomenally poor performer of late. Shares are down more than 80% from their early 2021 high, reaching record lows hit just last week. Yikes.

As the adage goes, though, there's more to the story.

In this case, the story is that this stock's been highly targeted by short-sellers betting the price will continue to sink. Of course, these bearish bets are made by selling the stock -- without owning it first -- which creates the very bearish pressure short-sellers hope to see. As of the latest count, nearly 22% of Chewy stock's float is sold short. That's huge. For perspective, Standard & Poor's reports the current short interest for the entirety of the S&P 500's constituent stocks is only around 2.3%.

All this short-selling comes with an important footnote, though. That is, for these short-sellers to eventually lock in any gains, they must buy Chewy shares back to close out their current short position. That puts bullish pressure back on a stock.

And given how many people need Chewy shares to stay down to protect their trades' current gains, even a moderate uptick in the stock's price could cause the crowd collectively sitting on 17.5 million shorted shares to panic, prompting rapid-fire purchases of the stock. This, of course, creates a self-fueling rally: The higher the stock climbs, the more panicked these short-sellers get. (This phenomenon is called a short squeeze, by the way.)

What's so encouraging in this regard is how well the stage is set for this prospect.

Although the stock has been sinking for nearly two years, the analyst community is unwavering in its optimism. Most of them are bullish on the stock, and their consensus price target of $34.22 is a hefty 85% higher than Chewy stock's recent price. In fact, the stock's present price is just a bit under even the lowest of all the current price targets on Chewy.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.

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