Table of Contents
Pet care stocks have historically been considered low growth and unexciting. However, investors can still achieve significant returns in this sector over the long term. Recent reports indicate that the industry is experiencing growth driven by secular tailwinds and supported by the consumer shift towards consumables and services. One key takeaway from the Q2/Q3 reporting seasons is the improvement in cash flow and free cash flow across the board.
Key Points
- Pet care stocks are experiencing downward trends despite improving cash flow.
- There is high short interest in this group, indicating potential for a short squeeze.
- The strength in consumables and services aligns with consumer trends and predicts sustained growth in 2024.
- There are 5 stocks that show better prospects than Chewy.
Currently, these pet care stocks are facing significant market pressure. Four out of the five stocks analyzed have a high short interest, making them susceptible to a short squeeze if the right catalyst occurs. The fifth stock, on the other hand, is in an advantageous position to deliver market-beating growth as it has no significant short selling and is trading at or near rock-bottom prices.
Chewy.com (NYSE: CHWY) is one of the highly-valued stocks in the pet care sector. In Q2, Chewy demonstrated clear momentum and is expected to achieve 11% year-over-year revenue growth. The price-to-earnings multiple is projected to decrease from 47X to 37X next year. Analysts have a moderate buy consensus on Chewy, with a price target that is 65% higher than the recent price action. The stock is also supported by institutional interest, including a significant investment from hedge fund Point72.
Freshpet is Turning its Ship Around
Freshpet (NASDAQ: FRPT) faced headwinds to growth last year but has since been working on a turnaround strategy. The Q2 report showed mixed results, with revenue below consensus but a year-over-year increase. Margin expansion and better-than-expected bottom-line results indicate a positive trajectory. Freshpet recently reached an agreement with one of its large investors, clearing the path for future growth. Analysts consider Freshpet a moderate buy, with a price target that is approximately 19% higher than the recent stock price.
Petmed Express is a High-Yield Play on Pet Care
PetMed Express (NASDAQ: PETS) is the laggard in the group but is showing signs of stabilization. The company has enhanced its offerings by adding services and products, resulting in increased engagement and sales. The CEO believes that a pivotal moment has been reached, and the company is expected to continue growing and return to profitability. Although the valuation is at 20X compared to next year’s outlook, the dividend remains risky. PetMed Express pays a solid 10% yield, but there are concerns about its long-term sustainability.
Wag! Group Could Gain Triple Digits
Wag! Group (NASDAQ: PET) operates a full-service platform for pet owners, pet-care givers, and pet-care services. The company reported a 55% year-over-year increase in revenue driven by a 42% increase in users. This impressive user growth, coupled with deepening penetration, positions Wag! Group for continued growth. Analysts suggest that the Q3 consensus figures underestimate the company’s potential, indicating another catalyst for the market. Despite being almost 0% short, the stock is trading 200% below the consensus figure, and even the low price target implies triple-digit upside.
Petco Health + Wellness Gets Unfairly Punished
Analysts have observed strength in consumables and services, as well as positive updates on the company’s turnaround efforts. Though the targets have been lowered due to recent results, analysts still see potential for double-digit trading above post-release levels. The consensus is that the stock could increase by approximately 80% when investor interest grows in these pet care stocks.
