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Motley Fool: Investors could chew on this stock

Chewy is starting to benefit from supply chain improvements as well as growth in pharmacy and other high-margin services.  (Courtesy of Chewy)
Motley Fool

Pet e-commerce company Chewy (NYSE: CHWY) is well-loved by its customers, but investors have turned their noses up at the stock.

The company went public in June 2019 at $22 per share, but the stock was recently trading around $17 per share. But its price-to-sales (P/S) valuation was also recently its lowest ever, at just 0.6.

Along with the relatively low valuation, there are multiple reasons to consider Chewy for your long-term portfolio.

For starters, its profitability is growing.

The company has 16 fulfillment centers to support its $11 billion e-commerce business, and it has fully automated five, improving efficiency significantly.

Chewy is now also making money from advertising, via sponsored listings. This helps boost its gross profit margin and could keep pushing profits higher as it scales.

Meanwhile, Chewy’s market opportunity extends far beyond retail products.

It just opened its first veterinary clinic and intends to open several more in 2024. And the company has also developed software to help operations at third-party clinics.

This growth opportunity expands its market by $11.5 billion, according to management.

All is not rosy at Chewy, though: It hasn’t seen customer growth for two years.

Its current stock price may turn out to be a terrific opportunity if it can turn that around. (The Motley Fool owns shares of and has recommended Chewy.)

Ask the Fool

Q. Are interest rates heading lower soon? – F.W., Chicago

A. No one knows for sure, but it certainly looks like it.

The Federal Reserve’s Federal Open Market Committee (FOMC) meets at least eight times a year and decides on any changes to America’s short-term monetary policy, most notably raising or lowering interest rates.

The most recent meeting was in March; the FOMC decided to leave interest rates unchanged, primarily because inflation, while down from recent levels, has not gotten close enough to the goal of 2% annually.

Inflation, as measured by the consumer price index (CPI), was recently 3.2% – a little more than the average inflation rate over the past century, though the rate has sometimes been much higher or lower.

Assuming inflation keeps inching down, many expect the FOMC to enact several interest rate reductions this year.

Those might begin as early as June, with a target federal funds rate between 4.5% and 4.75% by the end of the year, down from the current 5.25% to 5.5%. (The federal funds rate is the interest rate at which U.S. banks make overnight loans to each other.)

Q. How do tax inversions work? – D.F., Fayetteville, North Carolina

A. A tax inversion, or corporate inversion, happens when a U.S. company becomes a subsidiary of a foreign company (in a country with more favorable corporate tax rates), though the U.S. branch of the company generally remains in charge.

It’s a legal maneuver undertaken to shrink the U.S. company’s tax bill, but it has been heavily criticized for robbing the U.S. of significant tax revenue. An example is the medical device giant Medtronic, which bought the Irish health care concern Covidien in 2015 and is now legally headquartered in Ireland.

My dumbest investment

My most “what were you thinking” investment happened when I was right out of college.

A boiler room cold caller went through the employees in my office and talked us into buying some stock. I don’t even remember its name.

Flush with cash from a real lob, I put $700 into it.

Pre-internet, it took some of us a while to figure out that the promised tripling (or more!) of the stock in a year was part of the sales pitch and had no basis in reality.

I managed to sell the position for only a 20% loss and watched it crater over the next year to a 100% loss.

I learned my lessons on stock picks from random phone callers, and on investing without due diligence or an overall strategy. – A.W., online

The Fool responds: Those are great lessons you learned, and it’s good to learn them early – and to lose only 20%.

The Financial Industry Regulatory Authority (FINRA) has warned: “Typically run as outbound call centers, boiler rooms are characterized by high-pressure sales pitches from promoters targeting retail investors with highly speculative – oftentimes fraudulent – investments. And this goes beyond phone calls; today’s boiler rooms also rely on more modern means to contact potential investors, such as messaging apps and social media.” Yikes!