Pets Allowed

 | Nov 14, 2013 | 2:30 PM EST
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Washington may be paralyzed by political gridlock, and Red Sox and Yankees fans may never like one another, but there is one thing most Americans agree on: They love their pets.

According to the Humane Society and a survey by the American Pet Products Association, there are approximately 83.3 million owned dogs and 95.6 million owned cats in the U.S. (the human population is 317 million). Among households, 47% own at least one dog and 46% own at least one cat. The average annual expenditure by dog owners on routine veterinary visits is $231 and $193 for cat owners.

That's a lot of pets and a lot of money spent on them. Not surprisingly, companies have positioned themselves to benefit from this love of pets. I want to tell you about two such companies that not only take full advantage of the pet market but also get the attention of my guru strategies, which are based on how well-known investors invest. I automated these strategies so I could quickly analyze any stocks the way these investors analyze stocks.

MWI Veterinary Supply (MWIV) is one the largest veterinary distributors in the U.S. It sells pharmaceuticals, vaccines, supplies, veterinary pet food and other products. The company is growing rapidly, with revenue for fiscal 2014 ending Sept. 30 expected to rise 23% to 25% and diluted earnings per share to increase 10.5% to 14.5%.

In December 2011, I wrote about MWI when the stock was trading at about $67. Today, it's close to $160 a share. Sounds expensive, but my James P. O'Shaughnessy strategy identifies this as a stock worth meowing about. The company has a market cap of $2.1 billion, EPS has increased in each of the past five years, and it has low price-to-sales ratio of 0.90 (1.5 is the maximum). Among companies that pass these three O'Shaughnessy tests, 50 become recommendations based on their relative strength, which is a measure of how well a stock performs relative to the market. MWI, with a relative strength of 74, is in the top 50.

PetSmart (PETM) is the largest specialty pet retailer in the U.S., with nearly 1,300 stores. This helps explain why my Warren Buffett-based strategy picks this company. The strategy, like Buffett himself, looks for companies with a competitive advantage, such as being the top player in a market, which PetSmart is. The strategy focuses on PetSmart's EPS, which has increased in nine of the past 10 years, its modest debt, and a return on equity that has averaged 20.3% over the past decade. The strategy projects that investors buying at today's price can expect an average annual return of 13.5% on their investment over the next 10 years.

Even if you are not a pet lover, you should appreciate how strong and well positioned these two pet-oriented companies are.

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