The major theme for 2020 was the coronavirus pandemic and the resulting stay-at-home orders by local governments to help slow the spread. Although those orders have been moderated, brick-and-mortar businesses are still facing constraints and some are suffering from decreasing sales. That is adding fuel to the already existing trend of sales shifting from in-person to online. The stock I recommend for 2021 is in the right place at the right time to seize on the opportunity.
Thankfully, several effective vaccines have been developed against the coronavirus. Still, it may take up to two years before there is a complete return to normalcy. That should give this e-commerce company time to acquire even more customers. Without further ado, let's take a look at my top stock to buy and hold for 2021.
High-value, long-term customers
Chewy.com (CHWY 3.76%) allows people to buy supplies for their pets online and have them delivered to their homes. The company was already growing fast but when the pandemic started and people wanted to avoid exposing themselves to the virus, sales only accelerated. In the first three quarters of fiscal 2020, its revenue is up by 46% from the previous year.
Many people have decided to get a pet to help them cope with increased loneliness during the pandemic. Importantly for potential investors, the average person in the U.S. spends over $1,100 per year on their pets. Combining that statistic with the fact that a pet is a long-term commitment for most people, and you've got yourself customers at Chewy.com with high lifetime value.
As of Dec. 8, Chewy.com has 17.8 million active customers, 40% more than it had at the same point last year. Those customers spent an average of $363 annually -- a figure that is far below the overall average spending on pets per person in the U.S., giving the company the potential to increase sales to existing customers.
The company is planning on capturing a larger portion of spending on pets by increasing the assortment available on Chewy.com. Another area of opportunity for shareholders is that management focuses on expanding the selection of proprietary brands on its platform, which come with higher profit margins. Having the capability to offer customers its own branded products could give it more negotiating power with third-party brands as well.
The price is right
Chewy's shares are trading at a forward price-to-sales ratio of just under 4.4, which is a relatively fair valuation compared to other high growth stocks (see chart). Admittedly, it's not an apples-to-apples comparison, but it just goes to highlight the fact that you can buy shares of this fast-growing company at a reasonable price.
Chewy is not yet profitable in terms of net income. However, it guides investors that it will be profitable on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for its fiscal 2020. Moreover, the third quarter's free cash flow was $32.9 million compared to negative $12.8 million last year.
Investors looking for a fast-growing company to buy and hold for 2021 can feel good about acquiring shares of this consumer discretionary stock.