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Chewy bets on autoshipping for the win

The Motley Fool Take

Not many e-commerce companies have managed to improve their profit margins in 2022 during this period of rising expenses, but pet-focused retailer Chewy has. There’s a lot to like about Chewy.

Active customers in its second quarter increased only 2.1% year over year. But thanks to repeat orders from this base of 20.5 million active customers, total sales grew 12.8%. Sales were bolstered by the predictable stream of revenue coming from its autoship program.

Autoship is a top reason to buy and hold this growth stock for the long haul. Fully 73% of Chewy’s total order volume is on speed dial. This helps management budget for the year ahead.

It reflects Chewy’s relative competitive strength too, as customers don’t seem to be seeking out alternatives to its product selection and prices. Over the last year, net sales per customer increased 14% to $462, and this metric has been steadily inching higher.

Given the company’s opportunities to potentially upsell its loyal customers new services such as pet insurance, which can generate high-margin sales for the company, the stock could be trading well below what it will be worth in another 10 years. (The Motley Fool owns shares of and has recommended Chewy.)

Ask the Fool

From G.W. in Kankakee, Ill.: What’s in the “Secure Act 2.0″ that might be passed by Congress?

The Fool responds: The House passed the bill in March, and the Senate is working on similar legislation. There’s a good chance that some combination of various plans will be passed by Congress this year.

Proposed legislation (as of early September) offers many provisions that can help Americans save for retirement. For example: Employers that offer 401(k) or 403(b) plans would be required to automatically enroll all new, eligible employees, starting with a 3% contribution rate and upping that by 1% annually until it reaches 10%. (Employees can opt out, though.) Workers age 62 to 64 would be able to make extra $10,000 “catch-up” contributions each year to their 401(k)s or 403(b)s.

Required minimum distributions from many retirement accounts must now be taken starting at age 72, and the Secure Act 2.0 proposes raising that age to 75 by 2032. The act would also make it easier for retirement plans to offer annuities, which can provide lifelong income for retirees.

From P.K. in Dallas: If a stock is priced at 80 cents per share but pays out more than $1 per share in dividends, is that a red flag?

The Fool responds: It sure is. For starters, stocks trading for less than about $5 per share are “penny stocks.” They tend to be very risky and are well worth avoiding.

Dividend-paying stocks, meanwhile, should be generating more in earnings per share than they’re paying out in dividends per share. Fat dividends are great, but the company may not be strong enough to sustain them.

The Fool’s School

Between 1928 and 2021, the S&P 500 index averaged an annual growth of 10.1% (with dividends reinvested), while U.S. treasury bonds averaged 4.9%. It’s hard to beat the stock market for building wealth over long periods, but over short periods, stocks can fall in value. So you may also want to invest in some bonds for diversification’s sake — especially as you approach and enter retirement — or for short-term income. Be sure you understand what bonds are and how they work first, though.

Think of bonds as loans, and often long-term ones. When you buy a bond from a company or government, it’s borrowing that money from you and promising to pay you a certain rate of interest. Bonds sold by the U.S. government’s Treasury Department are called Treasuries and have minimal risk. State and local governments issue municipal bonds, while businesses issue corporate bonds. Companies with a relatively high risk of defaulting attract buyers with high-interest-rate “junk” bonds.

If you buy a $1,000 bond with an interest (or “coupon”) rate of 3%, you’ll receive $30 per year in interest payments. When the bond “matures,” you’ll be repaid your principal (the loan you originally made — the bond’s “par value”). Most corporate bonds have a par value of $1,000, while government bond par values can be much higher.

Bonds can reduce a portfolio’s overall volatility. They can provide a reliable stream of income, via interest rates that can (but may not) outstrip inflation, and if you hold your bonds to maturity, the risk of losing your money can be low. If you sell your bond before maturity, though, its value may be lower if interest rates have risen, making your bond’s lower rate less attractive. Many investors don’t hold onto bonds for years until maturity, and bonds are often traded between investors, with their prices rising and falling in reaction to prevailing interest rates.

You’ll find some model portfolios featuring bond funds at our “Rule Your Retirement” service at Fool.com/services.

My Dumbest Investment

From B., online: My mistake 20 years ago was betting heavily on one stock and not getting out when it soared in value. My plan now is to sell when I make a big profit — but not all my shares. I’ll invest the money from selling in something new while keeping some of my original shares in place. If the stock does go down, I will have at least already made my profit. If I got out too early, at least there will be some left to grow. Maybe I won’t make millions, but thousands will still be appreciated.

The Fool responds: Your approach is reasonable — a compromise between leaving all your money in an investment or selling all your shares. There are two issues to consider, though: First, what portion will you sell and what portion will you keep? This decision can make a big difference in your end results.

More important, be sure to assess the health and growth prospects of the company before you consider selling the stock because you might want to hang on to, or at least keep more of, your shares. A company that’s headed to a 1,000% or 2,000% return over 20 years will see its shares rise and fall at different times, sometimes sharply. If you were to exit after a 100% or 200% gain, you could be leaving a lot of money on the table.

Who am I?

In 1995, I came to life as a subsidiary of American Radio. I was spun off as a separate company in 1998 and kept growing, largely via acquisitions. Through a 2005 merger with SpectraSite, I became America’s largest tower company. Today, based in Boston and operating as a real estate investment trust, I’m a premier independent owner, operator and developer of multitenant communications real estate; my portfolio has about 222,000 communications sites — more than 175,000 outside the U.S. I provide dozens of U.S. data center facilities, too. My market value recently topped $120 billion. Who am I?

Can’t remember last week’s trivia question? Find it here.

Last week’s trivia answer: KB Home

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