Barking Buys: 6 Pet Stocks for Your Portfolio

It's hardly an overstatement to say we love our pets. And the stay-at-home trend of 2020 has only added to the number of pet owners. Several top investment experts and contributors to MoneyShow.com highlight their favorite ideas in specialty pet products and services, including high-end food, online pet products, veterinary medicines and treatments, and pet insurance. Eddy Elfenbein, Growth Stock Advisor The most alluring quality of the pet industry for investors is consistency. Americans are expected to spend $75 billion on pets this year, including $16 billion on health supplies and medicine. The global market for animal health products was worth $47 billion last year and was forecast to advance at an average of 5.8% a year through 2027, reaching $73.6 billion, says Grand View Research. Better care has extended life expectancy, especially for dogs. That boosts the demand for drugs for cancer and chronic ailments such as osteoarthritis, with more owners willing to pay for what vets recommend. That is great news for a company like Zoetis , the world's largest pure-play animal health and vaccine company. The company should be able to optimize its leadership position. It has a wide range of products, including anti-infectives, vaccines, medicated feed additives and other pharmaceuticals for cattle, swine, poultry, sheep, fish and companion animals. These include some meds developed from advanced monoclonal antibodies. This broad diversification enables Zoetis to offset any temporary weak sales in one segment with stronger sales in others. Furthermore, nearly half of the company's revenues are generated internationally. Its global infrastructure gives Zoetis a big cost advantage over its peers. Zoetis also is different from human drug firms in that it benefits from a relatively short R&D and launch cycle for animal products, which can be tested more quickly than human drugs. Pets, or companion animals, now provide 45% of Zoetis's revenues (the rest is from livestock). And blockbuster drugs such as Cytopoint, an immunotherapy treatment for dog dermatitis, are common. At least 20% of the firm's revenue comes from pharma products protected by patents that both allow Zoetis to charge a premium price and insulate it from competition. Zoetis continues to expand its business lines too. The company recently sealed a deal to grow its animal supplements business through the acquisition of Platinum Performance, a manufacturer of nutritional products for horses, dogs, and cats. Thanks to impressive strength in its U.S. animal companion business (it grew at an 18% rate), Zoetis reported second-quarter results that exceeded expectations on August 6. It has now exceeded consensus forecasts for earnings and revenue for 14 consecutive quarters! This is the type of a company that you should always look for. Zoetis consistently beats expectations and has a fairly strong moat around its business. Rivals will find it hard to displace the company from its number-one position globally in animal medicines and vaccines. Briton Ryle and Jason Williams, The Wealth Advisory Chewy, Inc. provides pet food, pet products, pet medications, and other pet health products for dogs, cats, fish, birds, small pets, horses, and reptiles through its retail website, as well as its mobile applications. With rumors circulating that it's partnering with Walmart and that the behemoth has taken an equity stake in Chewy, the future is looking very bright for our shares. Analysts love the stock, and consumers love the products and service. The e-commerce game is still strong and even though bricks-and-mortar stores have reopened for the most part, Chewy's new customers seem to be sticking around. The stock was also added to the J.P. Morgan top long-term ideas list. With the just released earnings report, Chewy proved it's not just some stay-at-home stock. Despite the majority of bricks-and-mortar stores being open, Chewy reported 48% revenue growth, beat EPS estimates by a long shot, and saw EBITDA surge by over 150%. Retail stores may be opening back up, but its latest earnings numbers show that Chewy's 16.6 million new customers aren't going back. They've gotten used to the convenience and they're not giving it up. Nate Pile, Little River Investment Guide PetMed Express is essentially an online pharmacy for both prescription and non-prescription pet medications and supplies. Although you are naturally encouraged to support your local vet whenever you can, the reality of the situation is that even pet care in this country is changing rapidly. I believe the surge in pet ownership we have seen during these shelter-in-place times is only going to help accelerate the trend. Although it was certainly not fun to receive such a gut punch right after recommending the stock last month, a) I did not think the earnings report was that bad (but will admit the stock was due for some profit-taking after the run it has made lately), and b) I believe the long-term prospects are still intact. PETS is a buy under $35. Richard Moroney, Upside Stocks Central Garden & Pet Company sells branded and private-label products for gardening (42% of 2019 sales) and pet care (58%). The coronavirus outbreak coincided with peak gardening season. Still, Americans' willingness to spend on their dogs and cats bodes well for growth. Decent organic growth and acquisitions should help lift sales and earnings. Central Garden has acquired more than 50 companies over the past 25 years. A leading distributor of branded and private-label products, Central Garden reported organic sales growth of 16.5%. Gross profit margin rose slightly to 31.4%, reflecting a favorable sales mix. For full-year 2020, management now targets per-share earnings of $1.90, up 19%. Central Garden shares seem reasonably priced, particularly given the company's operating momentum. The shares recently trades at 23 estimated full-year earnings, an 11% discount to its industry group. Analyst estimates expect Central Garden will grow per-share profits by 1% in fiscal 2020 ending September and 9% next year. The stock is being initiated as a Buy. Mike Cintolo, Cabot Top Ten Trader Freshpet has one of those long-term, secular growth stories that keeps attracting more and more big investors and driving the stock higher over time. As pets have become an integral part of the family, people are willing to spend more on them, and Freshpet is the leader in selling higher-quality (and higher cost) food for Fido and Whiskers. The firm offers natural, vitamin-packed foods that are prepared at lower temperatures to preserve key nutrients; its offerings contain much more protein that competing brands and most users say they see a visible improvement in their pets' health. Longer-term, this is a goldmine of an industry, as the entire pet food sector is recession resistant, and the high-end pet food area is likely to more than double by 2025 (3.5 million household customers now, 8 million goal). That's all to the good, and even better than that is the fact that the pandemic, while causing some initial disruptions, has actually proven to be a boon -- in Q2, Freshpet's sales growth (up 33%) was the fastest its seen in years, and while e-commerce was just 5% of total sales, they more than tripled from a year ago. Earnings and EBITDA easily topped estimates as well, causing management to boost its sales and EBITDA outlook for the year. Trupanion also has a neat story (and company name) that centers around the fact that pet ownership is expensive. Annual routine veterinary costs alone can average anywhere from $200 to $400 for dogs and $90 to $200 for cats. Trupanion eases the financial burden of veterinary care by offering insurance policies for dogs and cats. The company offers policies in the U.S., Canada and Puerto Rico (it's one of the only pet insurers that will pay the vet directly, rather than making pet owners file a claim after paying out-of-pocket). The firm generates revenue primarily from subscription fees for its medical insurance (fees are paid at the beginning of each subscription period, automatically renewing each month). It also makes money by writing policies on behalf of third parties, as well as companies that offer pet insurance as a benefit to their employees. Trupanion recently posted a solid Q2, thanks to a stronger-than-anticipated performance in its subscription business, with total revenue growth of 28% and 744,000 total pet enrollments in the quarter. Subscription revenue was $92.5 million (+20%), while the monthly retention rate of 99% is hard to beat. For Q3, the firm expects subscription revenue between $98 and $99 million (up around 19% at the midpoint), predicting full-year growth of $384 million (+20%). Analysts, meanwhile, anticipate the top line will grow between 25% and 27% in the next four quarters. This story reminds us a lot of Freshpet -- most pet owners won't sign up, but given the size of the market (67% of households have a pet), all Trupanion needs is a small slice of the pie (it estimates it has just 1% of the addressable market) to post rapid and reliable growth for years to come.

Barking Buys: 6 Pet Stocks for Your Portfolio

As pets have become an integral part of the family, people are willing to spend more on them.

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