Chewy (CHWY), the well-known online pet retailer, has recently received a significant upgrade, moving to a Zacks Rank #2 (Buy). This positive change stems from a favorable trend in earnings estimates, a powerful indicator that often drives stock prices. The Zacks rating system relies solely on a company’s evolving earnings picture, analyzing estimates for both the current and future years. This system is particularly valuable as it provides a more objective perspective compared to subjective analyst ratings, which can be difficult to assess.
The correlation between a company’s future earnings potential and its stock price movement is well-established. Institutional investors, who play a significant role in market activity, utilize earnings estimates to determine the fair value of a company’s shares. When earnings estimates increase, it signals a more optimistic outlook, leading these investors to buy the stock, thus driving the price higher. For Chewy, the rising earnings estimates and subsequent Zacks Rank upgrade are strong indicators of an improving business foundation.
The Zacks Rank system is designed to harness the power of earnings estimate revisions. By analyzing four key factors related to earnings estimates, it classifies stocks into five categories, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell). This system has a proven track record, with Zacks Rank #1 stocks achieving an average annual return of +25% since 1988.
For the fiscal year ending January 2025, Chewy’s earnings per share are projected to reach $1.14, representing a substantial 65.2% increase from the previous year. Analysts have been consistently raising their estimates for the company, with the Zacks Consensus Estimate increasing by 58.4% over the past three months.
Unlike Wall Street analysts who may have a tendency to issue more favorable recommendations, the Zacks rating system maintains a balanced approach. At any given time, it assigns an equal proportion of ‘buy’ and ‘sell’ ratings across its universe of over 4000 stocks. Only the top 5% of Zacks-covered stocks receive a ‘Strong Buy’ rating, with the next 15% earning a ‘Buy’ rating. Therefore, Chewy’s placement in the top 20% of Zacks-covered stocks highlights its strong earnings estimate revision feature, making it a compelling candidate for potential market-beating returns.
This upgrade to a Zacks Rank #2 positions Chewy within the top 20% of Zacks-covered stocks based on estimate revisions, suggesting that the stock could experience upward momentum in the near term.
