New investors may not yet be experts regarding bear market rallies, so here's a quick primer on those scenarios. Put simply, it's a fast-paced, often short-lived rally by a stock that's mired in the confines of a longer-ranging bear market.
That may be what's playing out with Chewy (CHWY +2.00%). The once beloved pet equity is a good example of two things being true at once. Bad news: the consumer discretionary stock is 80% off its all-time high. On the more positive side of the ledger, shares of Chewy gained 17.5% for the 90 days ended Aug. 20.
Hey, that's nothing to scoff at; all rebounds have to start somewhere, and it's excellent work in a short time frame. However, investors need to tread carefully before assigning Chewy "no-brainer" growth stock status.
Chewy stock is rebounding, but it has a lot of work to do to reclaim lost glory. Image source: Getty Images
When luxury is a problem
Chewy customers and investors know this is not a luxury-brand stock. That label is typically reserved for high-end automakers or companies behind tony handbag and jewelry brands. As rewarding as pet ownership is (I know, I have a dog), it's typically not viewed as a pursuit of opulence.
The potential problem for Chewy, as it relates to the stock ever sniffing its record high, is that pet ownership is increasingly viewed as a luxury. As a result, the pet population is declining. Data indicate that in the first and second quarters, veterinarian visits declined year over year. Practices are dealing with those drops by hiking prices, but that's not tenable.
Expectations of declining pet ownership are at odds with Chewy's earlier-this-year commentary. The company sees people's embrace of four-legged (and other) friends rising over the long-term. However, pet retailers, including Chewy, are emphasizing pricier products and services they know affluent customers will pay for. Arguably, that's an admission that being a pet parent is a luxury.
NYSE: CHWY
Key Data Points
The rise vs. fall pet-ownership argument may well be one reason for the division within the investment community over Chewy. Some analysts recently pared back price targets for the name, while others see better opportunities in the e-commerce industry. The point is that there is too much debate to dub this stock a "no-brainer."
Not a lost cause
Chewy reports fiscal second-quarter earnings on Sept. 9, and that's an opportunity for the company to get out of the doghouse and show investors that consumer sentiment is perking up (assuming it is) and that it met or beat previously reduced guidance.
Beyond the earnings report, long-term investors mulling over this stock need to consider Chewy's commentary on efforts to boost consumer spending and progress in the company's evolution from a pure-play online retailer to a tech-driven pet healthcare destination that links vets, owners, and pets.
All of that is to say, there are a lot of moving parts with the Chewy investment thesis. More upside is certainly possible, but it's too early to apply the "no-brainer" label to this stock.
