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Which of These 5 Pet Care Stocks Could Be the Next Short Squeeze?

Pet care stocks offer significant returns for investors over the long term, despite being low growth and not particularly exciting. The sector’s growth is driven by secular tailwinds and supported by the consumer shift to consumables and services. One key observation 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 currently down compared to last year, and many are trending lower, despite improving cash flow.
  • There is high short interest in this group, setting it up for a potential short squeeze.
  • The strength in consumables and services aligns with broad consumer trends and is expected to sustain growth in 2024.
  • These are 5 stocks that we believe have more potential than Chewy.

However, these pet care stocks are currently facing significant market pressure. Four out of the five stocks have a high short interest, making them vulnerable to a short squeeze if the right catalyst emerges. This catalyst could potentially come from the release of Q3/Q4 results over the next few months. The outlier among these stocks is in the best position to deliver market-beating growth to investors, with virtually no shares sold short and all trading at or near rock-bottom prices. Leads the Way NYSE: CHWY is a highly valued stock, just like the others in this lot. Chewy displayed clear momentum in Q2 and is expected to achieve 11% year-over-year revenue growth this year. However, next year, the price-to-earnings multiple is projected to decrease from 47X to 37X, indicating a cautious outlook. Analysts have noted that free cash flow surged due to expected margin improvements that are likely to persist. The consensus among 20 analysts is a Moderate Buy rating, with a price target that is 65% higher than the recent price. This price target is backed by institutional interest and is considered firm.

Hedge fund Point72, managed by investor Steven Cohen, disclosed a large stake in Chewy earlier this year. The fund increased its holdings by approximately 300% to nearly 6%, which demonstrates a significant vote of confidence. This activity has driven institutional ownership to 97% and has been steadily increasing over the past few quarters.

Freshpet is Turning its Ship Around

Freshpet NASDAQ: FRPT faced headwinds to growth last year, but the company has been working on a turnaround. Recent results show signs of success in this transformation. While the Q2 report had mixed results, with revenue below consensus but still higher year-over-year, there was positive news in terms of expanded margins and outperforming bottom-line results. Furthermore, Freshpet recently reached an agreement with one of its larger investors, clearing the path for further progress. Analysts consider this stock a Moderate Buy with a price target approximately 19% higher than the recent price. Although the price target has slightly decreased compared to last year, it is expected to trend higher in 2023.

PetMed Express is a High-Yield Play on Pet Care

PetMed Express NASDAQ: PETS is currently the laggard in this group but shows signs of stabilization. The company has strategically added services and products to boost engagement and sales. The CEO believes a “pivotal” moment has been reached, as highlighted in the CQ2 report. The company is expected to continue growing and return to profitability. Despite this positive outlook, the valuation is at 20X compared to next year’s expectations, and the dividend remains risky. PetMed Express offers a solid 10% yield, but it is currently above the company’s ability to pay. While the board has recently declared a distribution that aligns with expectations, a dividend cut is likely in the next year. Nevertheless, the company has a strong balance sheet with enough cash to maintain the current dividend payout, although it may not last indefinitely, even with the expected earnings growth next year.

Wag! Group Could Gain Triple Digits

Wag! Group NASDAQ: PET is a full-service platform catering to pet owners, pet-care givers, and pet-care services. The recent earnings report revealed a 55% year-over-year revenue increase, driven by a 42% increase in users. This substantial user growth is further amplified by deepening penetration, with continued growth expected on both fronts. Based on the strength shown in Q2, the consensus figures for Q3 are considered too conservative, which could provide another catalyst for the market. Key takeaways from Q2 include record services revenue and double-digit growth across all segments. This stock has an almost negligible short interest but is trading significantly below the consensus figure, even though the low price target assumes a triple-digit upside.

Petco Health + Wellness Gets Unfairly Punished

Other notable observations from this sector include strength in consumables and services and a positive company turnaround update. Although analysts have lowered their targets due to the results, they still anticipate double-digit trading levels above the post-release levels at the lower end of the range. The consensus estimate suggests an approximate 80% increase. Therefore, once investors show interest in these stocks, they are likely to experience significant price increases.

Before rushing into Chewy, here’s something you should know:

Financehubusa keeps track of Wall Street’s top-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. Financehubusa has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on. Chewy is not included in this list.

View The Five Stocks Here

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