CHWY: The Inflation-Proof Stock I’ve Been Looking For

There is a lot of risk in the stock market. We’re just two weeks into the year, and market volatility is once again on the rise. After spending a good portion of 2021 at a more relaxed level, the VIX has crossed back above 20, and some experts are saying it may stay at heightened levels through 2022.

While many analysts are blaming the omicron variant of the coronavirus, others are noting that inflation concerns can no longer be ignored.

In fact, the Labor Department reported Wednesday that year-over-year inflation hit 7% in December, marking a level not seen in more than a generation.

But “high risk” is not synonymous with “sell everything and hide in a shelter.” Risk is a part of investing. We just have to consider how to work around it.

Because I believe inflation is a very real risk, I am recommending a trade in a company that delivers products consumers will still want to buy under any condition… because people really, really love their pets.

The Online Store For Everything Your Pet Could Want

If you have a pet, you likely know about Chewy Inc. (CHWY). This e-commerce company sells pet food, pet treats, pet supplies, pet medications, and other pet-health products, as well as pet services for dogs, cats, fish, birds, reptiles, horses, and more, all through its website and mobile app.

In the wake of the “pandemic pet” trend, the company has grown its customer base. In its most recent earnings release, management reported 20.4 million active customers — a 14.7% increase over the previous year.

More importantly, those pet owners are proving to be quite loyal, with net sales per active customer increasing 15.4% to an average of $419. And that number tends to keep growing the longer the customer has been around. In its latest earnings release, the company noted that “Year 2” customers tend to spend about $400 per year, an amount that grows to about $700 per year in “Year 3” and $900 per year in “Year 4.”

This growth in customers and spending per customer explains how Chewy was able to increase its profit margins in this high-inflation environment. Five years ago, the company’s gross profit margin was 16.6%; today, that number is up at 27.2%.

But this stock didn’t catch my eye solely for its ability to buck certain inflation concerns.

The other part of what makes CHWY such an attractive trade is the fact that it has recently undergone a massive selloff. Shares currently trading around $46 — a new 52-week low for the company, and 62% below its peak at $120. Throughout 2021, shares fell 34%. and are now undervalued.

At current prices, CHWY trades with a price-to-sales (P/S) ratio of 2.7. That’s less than half of what it was valued for at its peak.

Chewy’s share price tumbled in 2021 thanks to reopening economies. Sales growth slowed as people started spending more at brick-and-mortar retailers. Revenue still grew for the year, just at a slower pace than investors had expected.

Supply-chain disruptions also spooked investors. That’s certainly understandable; supply-chain issues have sent many companies off the rails this year. And these issues were responsible for Chewy’s higher input costs over the year. However, as previously mentioned, the company actually managed to increase its gross profit margins for the year, much to its credit.

How I’m Trading CHWY Today…

Warren Buffett, one of the world’s best-known value investors, once said it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.” In other words, he advised picking up stock at the precise moment when others are fleeing. Or, more precisely, “buy low, sell high.” At these fire sale prices, CHWY has plenty of room for longer-term upside. And we can use our covered call strategy to generate income while we wait for shares to get there.

Generating income from covered calls can act like gasoline on a fire when stocks are climbing.

Please don’t get bogged down in the fact that this is an options strategy. Like I mentioned, this is one of the most basic techniques out there. And in Maximum Income, I provide readers with a step-by-step guide on exactly how to execute each trade in order to generate extra income from the stocks that may currently be sitting idle in your portfolio.

Want to learn exactly how to get your portfolio working harder for you? I highly recommend trying a covered call strategy. I have a special presentation if you need help starting. It explains how to use this technique to receive monthly income on the stocks you own. You can view the presentation here.