Stock returns have been higher for several years than those of other investments, such as investment-grade bonds, real estate, and gold. Fortunately, you don't need a large sum of money to start investing in equities.
For instance, you can initially invest $1,000 and add to it regularly. If you like the stock, you can use dollar-cost averaging to build a position over time and smooth out your purchase price.
Growth stocks, whose companies have fast-growing sales, have been outperforming their value counterparts. Over the last 10 years through Aug. 21, the Russell 3000 Growth index returned 388.9% compared to 157.4% for the Russell 1000 Value index.
Of course, individual stock selection matters. Here's why I think Chewy (CHWY 0.48%) should be your top growth stock choice.
Image source: Getty Images.
A big market opportunity
Chewy offers pet products, supplies, and prescriptions online. It provides customers with competitive prices combined with convenient and quick delivery. It also has a strong focus on customer service.
And it's a big and growing market opportunity. U.S. pet spending grew from $92 million to $151 million from 2018 through 2024. That's nearly a 9% annualized rate.
With Chewy's major online presence, it's in a prime position to benefit from this growing market.
Economically resilient
If you have a pet, or know those who do, you understand how much they mean to people. Many think of them as members of the family. They wouldn't think twice about spending whatever is necessary to keep them healthy and happy, even during difficult economic times.
Pet adoptions increased tremendously during the early days of the COVID-19 pandemic, with many people forced to stay home. Pet spending also grew, despite people's own health and economic concerns.
Still, that period was very unusual. It's more instructive to examine the Great Recession. During that severe downturn from 2008 to 2010, spending on pets grew 12% while overall consumer spending dropped, according to the American Pet Products Association.
Growth runway
Management has been focused on retaining customers and gaining new ones. The efforts are apparent from statistics. Chewy had 20.8 million active customers at the end of its first fiscal quarter (ended May 4). That's 3.8% higher than a year ago. Active customers are those who have ordered a product or service at least once in the past year.
It also has an autoship subscription program that helps retain customers. These sales grew 14.8% year over year to $2.6 billion. They represented over 82% of the company's sales, up from 77.6% in the year-ago period.
Chewy has other growth drivers, including geographic expansion. It started operating in Canada in 2023, and the company should have plenty of room for growth internationally.
Its healthcare offerings also provide a big opportunity. They include medication, insurance, and the company's own clinics.
Unlike some other growth companies, Chewy operates profitably. It reported first-quarter operating income of $76.9 million, 19% higher than a year ago. The company's operating margin expanded from 2.2% to 2.5%.
Valuation
Investors have noticed the company's success. The share price has gained 18.2% this year (ended Aug. 22). That easily outpaced the S&P 500 index's 10%.
That also means the stock doesn't trade at a low valuation compared to the market. The stock has a price-to-earnings (P/E) ratio of 43 compared to the S&P 500's 30.
That shouldn't dissuade you from buying Chewy's shares, however. The stock has a higher multiple due to its exciting growth prospects.
To quote the legendary investor Warren Buffett, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
