BY MARK SEBASTIAN
September 7, 2023
Each week, I’ll give an overview of a stock and Licia Leslie will follow that up with a chart analysis the next day. Bill Griffo will chime in with macro analysis and Andrew Giovinazzi will then finish out the week with a volatility breakdown.
Have a stock YOU want us to review? Email my team here. – Mark
Hey Traders,
Earnings season is over.
We have seen the high flyers and mega caps get kneecapped.
We have seen the less loved blow up.
The trend for Q2 earnings was if the stock rallied hard into earnings…it got punished.
There were exceptions … The exceptions we noticed generally saw a TON of bull calls trading ahead of earnings.
The stock we are going to discuss was one of those names….
It also has a great story…this is why when the stock beat earnings badly given all the call buying that took place…
I was shocked when the stock got pummeled.
What stock am I thinking of? As a dog owner…I use this company…
Licia…and her cats…use this company…
Andrew and his dog…yup…they are users…
I am not talking about Amazon, I am talking about the Amazon of pet care…
Chewy…
Let’s break it down…
The Good
The company MAKES money…remembering PETS.com…that is a really good start.
The company produces positive cash flows producing .35 a share in cash.
CHWY has over 2.00 a share in cash and makes money….there is some safety in the future of the company.
Chewy only has about 370 million dollars in debt, which means they are not using operating profits to deal with high debt payments….
From a business positioning standpoint…people love their dogs …and cats…and chewy makes getting food, treats, toys…just about anything your pet would want…easy.
This is why the company produces so much revenue, 25.13 dollars per share in revenue. Better than 1 to 1.
It’s a growth company, so having those metrics…is pretty good.
I like the business model and the approach.
That doesn’t mean there isn’t some downside.
Look at the chart:
CHWY was over 100 dollars a share, it is now 24.43
This leads us to…
The Bad
Valuation.
You have read about my feelings about the current NVDA valuation…
The company is worth 1.2 Trillion dollars and has a PE of 117.
CHWY has a PE of 212…
That is really high….
The biggest issue with CHWY is not the business model or the raw numbers…
It’s the multiple. That multiple is extremely high and the market is noticing…thus the poor stock performance.
It is hard to say the company should be twice its current price when the PE is that high.
Other issues…Amazon…what does Chewy do that Amazon does not?
You can get just about everything Chewy does on Amazon, Walmart, or Target.
The company is trying to create a niche where a niche might not exist.
The Verdict
I would not go long…but I would (and did) sell puts in this name.
I like the stock below 20 dollars a share…and as a momentum play in an environment where momentum is really positive, I would potentially as a trade buy it above 28.
The greater point is where it sits is no man’s land and I would not buy it.
But taking delivery below 20 I will do that…and jumping on board when the whole market is rallying… can be a nice short-term trade.
At the current levels…I am neutral.
Questions about that? Leave a comment below!
Your only option,
Mark Sebastian
Mark Sebastian
Founder & CEO, Option Pit
See what's hot at option pit
CAPITOL GAINS: SMR Aug16 7 call closed for a 150% gain
DELTA STRIKE: VLY Mar15 8 puts closed for a 88% gain
PFE May17 26 calls closed for a 66% win
OP MENTORING: SPY Mar22/19 510 put calendars and 520 calls for 6.4% gain
OPTION SHOPPER: ERX Mar28 65 calls closed for a 90% gain