With the Federal Reserve aggressively raising interest rates, many economists predict the U.S. economy will fall into a recession at some point in the near future. No wonder the S&P 500 has dropped by 16% this year.
Still, that gives patient investors a potentially rewarding opportunity. But you should do further research to determine whether a stock's price decline has created a value opportunity.
With consumer spending possibly slowing as the central bank tries to reduce inflation, let's look at Chewy (CHWY 1.92%) and Six Flags Entertainment (SIX -1.51%) to see which one provides the better investment opportunity.
Image source: Getty Images.
Chewy
Chewy, an online seller of pet products, supplies, and prescriptions, attracted a lot of attention during the early days of the pandemic when pet adoption skyrocketed. In 2020, the stock price leaped by 210%. But the shares have since hit a rough patch.
The company has a lot going for it, though. Management, quoting statistics from Packaged Facts, notes that 95% of dog and cat owners considered their pets a part of the family, and and that the U.S. pet market is expected to grow 7.5% annually from 2020 to 2025.
Furthermore, during recessions, pet spending tends to continue growing. For instance, it grew by 12% from 2008 to 2010, the years encompassing the Great Recession, while overall consumer spending fell. This jibes with empirical evidence about how people feel about their pets and their willingness to spend money on them even in the face of economic hardship.
How has this translated into revenue and profitability growth? In the recently released results for the fiscal third quarter, which ended on Oct. 30, sales grew by 14.5% year over year to $2.5 billion. This was driven by higher spending per customer, which rose nearly 14% to $477. The company also added active accounts, ending the period with 20.5 million, versus 20.4 million a year ago.
The implementation of higher prices, along with an easing in supply chain issues and inflation, allowed Chewy's gross margin to expand to 28.4% from 26.4%. Its operating loss narrowed significantly to $434,000 from $31.9 million a year ago.
With strong customer service that has built shopper loyalty, Chewy remains poised to continue growing sales and push toward operating profitability.
Six Flags
Six Flags owns and operates North American theme parks, with the bulk of them in the U.S. Unlike Chewy, its results were hurt during the early days of the pandemic as shutdowns greatly affected its operations. The share price dropped by more than 24% in 2020 and continued falling, particularly this year.
The company has been adding new attractions, including taller and faster roller coasters, in an effort to attract guests. And a year ago, new management undertook initiatives designed to empower employees, with a focus on guests. Its plan also includes "premiumization" that involves higher ticket prices and upgraded guest amenities.
But higher prices could hurt Six Flags' results during a recession. Although we aren't in a downturn yet, revenue for the first nine months (ended on Oct. 2) fell by 9% to $1.1 billion while attendance was down by 25% to 16.1 million. And net income dropped by 28% to $96 million. True, there was higher guest spending per capita as both admission and in-park spending increased. But there are limits to raising prices, particularly if the economy slows down.
Chewy continues to build its business based on a strong foundation: an attractive market, loyal customers, and convenient service. That makes it the clear winner over Six Flags, which has been implementing price increases, which could deter attendance, particularly in a downturn. Hands down, Chewy is the better investment.
