Going to the dogs

Never mind bulls and bears. The smart money is down at the kennel

Globe Investor Magazine, Feb. 21, 2008
Out of the box with Howard Lindzon
Illustration by Jon Han

As an investor who believes in following trends, I choose to look at the world and the markets as if the glass was half full. Over the years, I’ve discovered that riding positive trends gives me an edge as a smaller investor, and one that I’ve been watching is the ever-growing demand for pet-related products and services. Here is why I think you can make money from pets.

Let’s start with a few statistics: 44 million households in the United States have at least one dog, and 38 million have at least one cat. In other words, some 63% of American households have pets—a dramatic increase from 56% in 1988. If we include birds, snakes and fish, there are twice as many households in the U.S. with pets as there are households with children.

Another startling statistic comes from Mark Penn, co-author of Microtrends: The Small Forces Behind Tomorrow’s Big Trends, who says that 1% of pets in the U.S. live better than 99% of the world’s popula-tion. Pet products represent one of the top 10 retail segments in the U.S., with Americans spending almost $40 billion (U.S.) on their pets in 2006, up from $17 billion (U.S.) in the early 1990s. In that same year, they spent more than $9 billion on over-the counter medical treatments and supplies for their pets.

What really caught my eye is that most pets live four times longer than they did 30 years ago, so veterinarians are administering a host of new health treatments for pet obesity, kidney failure or heart conditions that go way beyond standard immunizations. For investment purposes, I like these numbers, and there are two possible ways you can play them: pet products or pet health care. In a correction or a volatile market, like we’ve had so far in 2008, there is no safe place to hide. Growth stocks such as the ones I’m about to suggest will get smacked around, but the underlying business trend will stay intact. Now, I don’t recommend the retail option because I prefer to buy stocks at all-time highs, and no pet retailers fit that category at the present time. Even so, PetSmart, the largest pure play in pet retail products, is a company that will continue to be a powerful force.

Pet health care is hotter. In this category, VCA Antech Inc. (WOOF/Nasdaq) is a long-time trendsetter with a clinical laboratory system that served over 14,000 small animal hospitals nationwide in 2007. The company also has its own network of more than 400 animal hospitals that catered to the needs of over 4.9 million pets last year. VCA Antech’s hospitals have an edge because they employ support staff to handle administrative tasks, freeing up doctors to provide better and faster service to customers.

Abaxis Inc.* (ABAX/Nasdaq) offers medical testing right in the veterinarian’s office, and is worth a look, too. Its latest innovation is the VetScan VS2, an in-clinic diagnostic test that needs only two drops of blood to diagnose a variety of ailments.

With the pet food scare in 2007, Neogen Corp.* (NEOG/Nasdaq) has hit a sweet spot. It manufactures kits to test the safety of products designed for animals, including pet food. Neogen is becoming a very recognizable name in the high-priority business of pet safety. The company also provides testing kits that analyze human food for bacteria, natural toxins, genetic modifications and the like.

Finally, MWI Veterinary Supply Inc. (MVIV/Nasdaq) is a pet product distribution business with an integrated ordering system that makes it possible for veterinarians and pet owners to purchase whatever they need from one company in one shipment. MWI has also opened new shipping points throughout the western and southwestern regions of the U.S., improving the transportation process.

Of course, it’s possible I am a little overoptimistic about this trend because of Bagel, my dachshund. But, all the same, I’m betting that pets will be a hot commodity for some time to come.

*I’m long on Abaxis Inc. and Neogen Corp.

HOWARD LINDZON is the creator of Wallstrip.com, a web show on stocks, and the founder of investment firm Lindzon & Associates in Phoenix, Arizona.