We never thought we’d be recommending a pet food and supplies stock in the Model Portfolio, but the story behind Chewy (CHWY) presents a great mix of steady, reliable long-term growth, as well as defensive characteristics, asserts Mike Cintolo, editor of Cabot Growth Investor.
On the growth side of the equation, Chewy looks to be the "Amazon" of the giant pet supplies industry ($100 billion of sales in 2020!).
The company has 13.5 million active customers (up 27% from a year ago) that are buying more than ever (average purchase up 10%), thanks to greater brand recognition and new products (including pharmacy offerings).
And the reliability of that growth should be hard to match—70% of the firm’s revenues are from auto-shipped products (much of them staples that are needed every month or two), and overall, pet supply sales are recession resistant (they grew throughout 2008-2009).
Similar to, say, a Booking (BKNG) — formerly Priceline — many years ago, Chewy looks to be the main beneficiary as a gigantic industry sees sales shift from in-store to online.
There’s no reason the firm’s top line can’t expand 15% to 25% for many years (analysts see it rising 32% in 2020), and while earnings are in the red, free cash flow hit breakeven last year and is likely to rise going forward.
The stock is both new (public last June) and powerful (new highs on big volume), acting like a fresh leader. If you haven’t bought in, you can start with a half-sized position (5% of the portfolio) here or on any weakness. We’ll be using an initial loss limit in the $36 area (nearly 20% below our cost).
