Sunday, 1 October 2023

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Sometimes, the Smart Money Can Get Things Wrong – TipRanks Financial Blog

Sometimes, the Smart Money Can Get Things Wrong – TipRanks Financial Blog

Given American households’ love for their furry family members, it’s not surprising that both retail investors and the pros have speculated on the eventual comeback of online pet products retailer Chewy (NYSE:CHWY). However, with an options trade noticeably going awry, the fallout confirms that sometimes, the smart money can get things wrong. I am bearish on CHWY stock.

CHWY Stock Seems Appealing at Face Value

Without any context, CHWY stock would appear to be a frightening proposition. Since the beginning of this year, shares have fallen by ~46%. However, it’s also understandable that many observers believed Chewy could offer deep value. After all, Americans love their pets, and the data confirms this point.

Most notably, the American Pet Products Association (APPA) reveals that pet industry expenditures in the country surged to $136.8 billion, marking a notable uptick from the previous year’s figure of $123.6 billion. While this indicates a deceleration in growth, it’s essential to weigh in the broader economic picture.

In particular, last year bore witness to significant headwinds, notably severe inflationary pressures. This was further exacerbated by the Federal Reserve’s decision to hike benchmark interest rates, an effort to curb inflation but one that also increased borrowing costs. Consequently, consumer spending felt the pinch, particularly as major corporations rolled out layoffs that continue to this day.

Despite these unfavorable circumstances, the pet sector stood its ground. The APPA data underscores a compelling narrative: even when faced with economic uncertainties, American households remain committed to their pets. This unwavering dedication suggests that Chewy operates within a segment that, despite broader market volatility, holds a significant degree of insulation against external shocks.

Unfortunately, this assumption didn’t quite pan out for tactical (and speculative) traders.

Options Traders Got Burnt on Chewy

As TipRanks reporter Kailas Salunkhe noted in late August, while Chewy reported an earnings beat for the second quarter on both the top and bottom lines, its net margin took a hit, narrowing to a scant 0.7%. Such a margin compression alarmed investors, signaling rising operational costs and increased promotional activities. Still, this development fueled the flames of speculation.

While the disappointing margin may have perturbed traditional investors, the options market…

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