Congressman Ro Khanna’s 2 Beaten-Down Stock Picks

Congressman Ro Khanna, a Democrat representing California, has been making waves with his stock picks. His recent financial disclosures reveal that he has been steadily investing in two companies through June and July. One of these investments is Uber Technologies, Inc., which appears to be a consistent holding for him, with no sales recorded in the period. The second company is Chewy Inc., a pet food and supply retailer.

Uber's stock has dropped about 18% over the past year. Meanwhile, Chewy has seen a more significant decline of approximately 40% over the same period, as well as a 30% decrease thus far in 2023. Investors are wondering if now might be a good time to buy these stocks on the temporary dip.

Chewy operates an online business selling pet food, treats, supplies, and medications. A key component of their business model is Autoship, a subscription program that allows customers to set up recurring deliveries. In Q1, Chewy's net sales grew by 7.7% year-over-year. The company's gross margin expanded to 30.1% and its adjusted EBITDA margin increased to 7.5%, representing a substantial 130-basis-point year-over-year improvement.

Despite these positive trends, Chewy added nearly 200,000 new customers in the quarter, bringing its total to 21.5 million active customers. This growth occurred despite a challenging consumer environment.

Analysts argue that Chewy's margins have the potential to improve further. One primary driver of this potential is sponsored advertising on the platform, where brands pay for placement, as customers are already shopping. Chewy believes that advertising could reach 3% of sales with margins as high as 70%. Additionally, the company's plans to open 10 to 12 Vet Care clinics and its focus on fulfillment automation and cost discipline are expected to contribute to these margin improvements.

Furthermore, Vet Care's growth story is significant, as the company acquired Modern Animal in April, with over 40% of Vet Care customers being new to Chewy. These new customers typically spend about $900 in their first year, and existing customers tend to increase their wallet share after visiting a clinic. On a forward non-GAAP earnings basis, Chewy's stock trades at 15.21 times earnings, which is 5% cheaper than its peer group median.

Trailing non-GAAP is at 17.23 times earnings, while enterprise value to sales sits at 0.74 times trailing and 0.71 times forward, representing 42% and 44% discounts, respectively, compared to sector medians.