Stock Picks for Pet Lovers

 | Apr 22, 2013 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

petm

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zts

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pfe

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wfm

The relationship with our dogs has changed a lot since I was growing up. Back when I was a child, a dog was something a family got for the kids. That dynamic has changed over the last few decades as the growth of households headed by singles or couples without children has increased. Dogs are no longer for the kids; they are our kids. This is even reflected in the names we give our canine friends. Popular names such as Lassie, Rin Tin Tin, Marmaduke and Princess have been replaced by Charley, Patty and Robbie.

I recently moved into a condo on the bay in Miami -- a large 40-story complex that is very dog friendly. On our thrice daily walks, Cooper (my four-year-old golden retriever) and I met scores of our neighbors. The odd thing is I can tell you just about every name of the dogs in my building but only know about four or five of the residents by name.

One of the interesting things about these encounters is you find out you are not the only one that might be accused of overindulgence when it comes to caring for your canine. We no longer leave our "children" at kennels when we leave town. We take them to cage-free dog hotels where they can play with their friends, have nap time and get bathed and pampered while we are on that business trip. All for just $40-$50 a day! We may put off making a doctor's appointment when we are sick, but if Cooper's nose is warm for two days in a row, I take him to the vet.

All of this leads me to a thesis that spending on our pets is recession proof. Dog owners might cut down on their trips to Whole Foods (WFM) or put off buying a new car for another year if the economy turns down again. However, the dog(s) in the house will continue to live high on the hog -- regardless of economic conditions. With that in mind, here are two stocks I like based on our shifting relationship with our pets.

Large specialty pet retailer PetSmart (PETM) is the well positioned to advantage of the growing indulgence of our pets. I recently picked up the stock for $62 a share after it pulled back when the company provided a conservative outlook. The shares have recovered to $67, but I still like them and would add to my position if we see a decline in the overall market.

The company has averaged just under an 18% compound annual growth rate (CAGR) for earnings over the past five years despite the difficult economic conditions. PETM also sports a very reasonable five-year projected PEG (1.10) for a specialty retailer. The company is adding 3% to 4% to its store count each year and also moving more into higher margin pet services (excluding grooming), which now make up over 10% of annual revenues.

Zoeltis (ZTS) is an animal drug (excluding flea and tick products) and health manufacturer that recently spun out from Pfizer (PFE). It had a successful debut and the company has a bright future as the biggest pure animal health play in the market. Medicines for animals have lower failure rates that those for humans and are also less costly to develop. Although a bit pricey, trading at at 20x forward earnings, the stock of this more focused company is poised to thrive. It should also benefit from the growth in spending on animal health. The shares are now selling just below $33, and I would buy them on any pullback to $30.

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