Fido stocksLast year, an octopus named Paul proved quite adept at predicting winners in the FIFA World Cup. While his stock-picking prowess never was tested, his skills do suggest an interesting idea for investors -- consulting the domesticated animal kingdom for investing ideas.

It's not as far-fetched as it might sound: Historical returns have shown that growth in pet products has proceeded at a steady pace. And more than half of households have a built-in product focus group -- a furry, fuzzy or scaly pet that is probably more than eager to test the latest and greatest pet products.

Want to throw your portfolio a bone? Follow your dog's nose and see what pet products make his tail wag in delight.

The cost of unconditional love

According to the American Pet Products Association, Americans spent $48.4 billion on their pets in 2010, and as of 2008 more than 62% of households owned at least one pet.

Almost $20 billion of that amount was spent on pet food, $14 billion on veterinary care, and $11 billion on supplies and over-the-counter medicine, according to the APPA. These revenue figures have nearly tripled since 1994 and are even more reason to consider investing in the pet products sector.

Cashing in on Fido and Fifi

Pets.com is long gone, but thankfully we're left with a few highly profitable places to dig for investment opportunities:

Company
5-Year Estimated Growth Rate
Forward P/E
Dividend Yield
PetSmart (PETM)
14.6%
16.2
1.2%
PetMed Express (PETS)
13.5%
13.7
4.2%
MWI Veterinary Supply (MWIV)
16.5%
22.4
N/M
VCA Antech (WOOF)
14.6%
13.6
N/M

Source: Yahoo! Finance.

Note that all of these companies have strong double-digit growth expectations, yet none are trading at a ridiculous valuation. As gravy, PetMed Express pays a very delectable dividend -- currently yielding north of 4% -- while PetSmart also pays out 1.2%, a figure I predict could rise in the coming years given its dividend growth rate of more than 100% in the past two years.

Also, don't discount what owners are willing to do to ensure the health of their four-legged family members. A typical visit to the vet usually costs hundreds of dollars and translates into healthy margins for pet companies like MWI and VCA Antech, which supply various products to veterinary clinics.

Big retailers hopping on the gravy train

The appeal of high-margin pet products is even attracting large names that want a piece of the pie. Wal-Mart (WMT), Target (TGT), and online retailer Amazon.com (AMZN) have expanded the amount of pet food and toy products they carry in the hopes of cashing in on this high-margin gravy train.

Have you bought into the pet products sector because of the animals you own? Share your thoughts in the comments section below.

Motley Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He regularly consults his obese dachshund for stock advice. The Motley Fool owns shares of PetMed Express and Wal-Mart Stores.


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mmcdonald2k

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Michael McDonald

July 23 2011 at 12:15 AM Report abuse rate up rate down Reply
meddvm

MWIV and other distributors are actually a BAD bet for the next 5 years. Why? Internet Pharmacies like 1800Pet meds.
Your local veterinarian can only buy a small amount of pharmacy products compared to a player like Petmeds, (and Target and Walgreens are testing pet pharmacies) and so the big players will be able to undercut the veterinary clinic or survive on a 10-20% margin that a clinic can't afford. They are also lobbying congress to mandate written prescriptions by veterinarians. MWVI, Paterson and HenrySchein sell those drugs to veterinarians currently - but in 5-10 years that market will be gone and your pet medications will be just like yours - a few samples at the office but off to the pharmacy for the prescription.

July 13 2011 at 12:08 PM Report abuse rate up rate down Reply
Condley

If your dog or cat likes the products, then by all means invest in it. They have a better nose for pet investments than we do.

July 12 2011 at 11:23 PM Report abuse rate up rate down Reply
Destiny Kitty

I would definitely invest in pet-related stocks. It seems to be virtually recession-proof.

People have become more alientated, working remote, socializing thru networking sites, high divorce rates, etc. all of which foster the demise of the nuclear family (If I remember correctly, Pew Research said that there are more people of all ages living alone than in any time in history ) .

Due to these demographic changes, people turn more and more to the love and companionship of their pets, cats, dogs, and other creatures.

Regarding vet care, I know that most of my friends, local and in cyberspace, will spend any available amount of money to ensure that their pets are cared for, including expensive operations, etc. when needed, if it is possibly affordable. More and more we are also turning to pet insurance as well, to cover these costs.

We are also going to higher end quality diets, to offset some of those vet visits that happen when an animal doesn't receive proper care and feeding.

No question about it, investing in pet-related stocks is a winner straight across the board, in my opinion.

July 12 2011 at 4:39 PM Report abuse rate up rate down Reply
jabukha

I bet Fido can and will do a much better job than Mutual Fund managers in selecting winning stocks, not only in the Pet industry, but across the board. Fot the past 3 years we have been seriously talking about how vulnerable European stocks are, yet Mutual Fund managers are still loading up in their porfolios on cheap European companies. Look what has been hapening to stocks in Ireland, Greece, Spain, Portugal & Italy.

July 12 2011 at 4:38 PM Report abuse rate up rate down Reply