Happy holidays, Merry Christmas and welcome to edition 599 of Insider Weekends.
With earnings related quiet periods upon us, I was not expecting to see a lot of insider activity last week but was pleasantly surprised to see a number of interesting purchases last week. A pair of mortgage REIT CEOs found their way into our list of top 5 insider purchases but the purchase that captured my attention the most was the sixth largest purchase of the week. James Star, the Executive Chairman of Canadian investment firm Longview Asset Management, purchased $1.79 million worth of Chewy (CHWY) shares on the open market. This is the first insider purchase at Chewy in well over two years as the pet products focused company went on a roller coaster ride from its $22 IPO price in June 2019 to a high of nearly $120 by February 2021 before giving back large swaths of those gains and dropping to the low $50s.
The pandemic related tailwinds that fueled pure play e-commerce retailers like Chewy and Wayfair (W) have subsided and this is reflected in the Chewy’s decelerating revenue growth rate and bottom line losses. Gross margin of 26.4%, despite a 90 basis point improvement year-over-year is also not that exciting. Looking at the cash flow statement, the company is generating significant free cash flow and non-cash stock compensation expense has been coming down for several quarters. During the last 12 months, while net income was just $10.8 million, free cash flow was $169 million. With an enterprise value of $24.4 billion, the stock is certainly expensive on an EV/FCF multiple but doesn’t look that expensive at an EV/Sales of 2.86. If the company can grow or even maintain its current rate of growth (24.14% last quarter) while getting a better handle on expenses, it would be worth exploring Chewy further.
I don’t normally invest in mortgage REITs because of their leveraged balance sheets and because some of them end up paying out more than they earn to retain their high dividend yields. Starwood Property Trust (STWD) appears to be more prudent and the company has been shifting its focus since 2014 from a commercial mortgage REIT to buying a portfolio of properties. The company started its shift by acquiring four high quality regional malls in 2014, followed by a 2015 purchase of multi-family properties and office properties in Dublin, Ireland and a purchase of 34 medical office buildings in the United States in 2016. The company benefits from its close relationship with Starwood Capital Group, a real estate focused private equity firm with $105 billion of assets under management. Starwood Property Trust yields 7.74% with a payout ratio of 93%. The recent pull back in the stock following a $397 million secondary offering afforded the company’s CEO and its President an opportunity to buy shares in the low $20s.
Insider buying decreased last week with insiders purchasing $307.19 million of stock purchased compared to $606.19 million in the week prior. Selling also decreased to $2.35 billion compared to $4.06 billion in the week prior.