Chewy Stock Plummets With Poor Outlook, but it's a Long-Term Bet
Chewy rolled over on heavy volume, when will it be safe to buy the stock?
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Online pet retailer Chewy Inc. CHWY is in the doghouse after losing nearly 11% on Wednesday. The Plantation, Florida-based retailer reported a wider than expected loss for its fiscal first quarter.
Analysts Weigh in
Analysts were quick to dogpile on Chewy. Mizuho analyst David Bellinger lowered his rating from outperform to neutral, while a Jeffries analyst downgraded Chewy from buy to hold.
Not all the news was bad. Trevor Young, analyst at Barclays, maintained his overweight rating and raised his price target for Chewy to $50 from $44. But the overall tone was negative, and institutional traders were heavy sellers, with Chewy falling on its highest volume of this year.
Let’s Get Technical
Today, we’re going to look at Chewy from two different angles. First, we’ll examine the chart for the past year, and then we’ll zoom out for a big picture three-year chart.
Chewy has gained nearly 90% since I first recommended the stock, just over a year ago. I'm not considering selling the stock, but there is a reason why I want to add to it carefully.
Chewy’s Short-Term View
The ferocity of Wednesday’s selling indicates that there could be more downside ahead in the short term. For that reason, I would add lightly to my Chewy position on its 50-day moving average (blue), currently located near $39 (point A).
However, I would consider a larger addition to my position at Chewy’s 200-day moving average (red), currently near $34 (point B). Chewy hasn’t closed below that key indicator this year.
One reason why I favor the 200-day MA is because there is a bullish trendline (black dotted line) just below it. That trend line, which has remained intact for nearly a year, comes in near $32 (point C).
Chewy’s Long-Term View
Looking at Chewy’s weekly chart, a huge cup-and-handle pattern has formed. Wednesday’s sharp pullback places the stock right back to the breakout point of this formation. This pattern suggests that Chewy could climb as high as $65 — a potential gain of nearly 60% from Wednesday’s close.
Good Boy
Despite Wednesday’s debacle, for the most part, Chewy’s been a good boy. Year to date, the stock is still up 20%. Over the past year, Chewy has managed a 78% gain.
According to the short-term chart, there could be additional downside ahead. But the long-term chart is more optimistic. Call me an optimist, because I’m sticking with Chewy for the long run.
At the time of publication, Ponsi was long CHWY.
