When it comes to guarantees, investing offers virtually none. The closest thing you'll get to a guarantee as an investor is the extremely strong likelihood that the broad-market indexes will increase in value over time. For instance, we've witnessed 37 stocks market corrections of at least 10% (not including rounding) since the beginning of 1950 in the benchmark S&P 500. In each and every occasion, these dips in the market have been completely erased by bull market rallies.
Of course, rarely are investors satisfied by simply mirroring the performance of the broader market. Instead, they want to beat it by buying into growth stocks. While picking out individual stocks or specific industries is clearly riskier than simply buying an index fund, I have one oft-overlooked industry that looks to be the closest thing to a no-brainer investment trend that you'll want to be a part of.
Ladies and gentlemen, behold the "paw-tential" of the pet industry.
The purr-fect long-term investment opportunity
Think about this for a moment: When the American Pet Products Association (APPA) first conducted its annual survey of pet ownership, 56% of households owned a pet. As of 2019-2020, the APPA's National Pet Owner Survey found that 67% of households (nearly 85 million homes) now owns a pet. This includes more than 63 million dogs, nearly 43 million cats, 11.5 million fish, close to 6 million birds, and millions of other reptiles and small animals.
Not only is this a numbers game that's shown no signs of slowing, but there's been an ongoing shift in thought as to how Americans view their four-legged friends. Back in 2007, Harris conducted a poll that found 88% of pet owners consider their pets as part of the family. But a more recent poll from Harris, conducted in 2016, found that 95% of pet owners consider their furry friends as family. With this emotional attachment building among American households, it's becoming easier to spend money on the health, happiness, and well-being of four-legged, winged, and gilled family members.
According to estimates from the APPA, $75.4 billion was to be spent in the U.S. alone on pets in 2019. This includes $31.7 billion on food, $19 billion on veterinary care, and another $16.4 billion on supplies and over-the-counter products. At no point over the past 25 years has there been a year-over-year decline in U.S. pet industry expenditures.
I'm going to go ahead and repeat this last point with some added emphasis. Despite the dot-com bubble bursting in the early 2000s, and the steepest recession in 70 years hitting the U.S. a little more than a decade ago, U.S. pet expenditures have gone up every single year.
Improved emotional attachment, rising pet ownership statistics, and a 25-year (and counting) streak of increasing U.S. pet industry sales is what makes this the no-brainer investment you'll want to be a part of.
Sniffing out some great deals in the pet industry
The big question, of course, is where to get started? Here are three pet-focused stocks that cover some of the fastest-growing trends in this industry.
According to Trupanion, only between 1% and 2% of all companion pets in the U.S. and Canadian markets are currently insured, presenting an incredibly long runway opportunity to become the go-to source for pet insurance. The company ended September with almost 614,000 enrolled pets, of which more than 479,000 were part of its subscription enrollees. This subscription service should prove to be Trupanion's bread and butter given that it's highly predictable and unlikely to see much, if any, customer churn.
Trupanion also happens to be on the cusp of recurring profitability. Following a $0.02-per-share profit in Q3 2019, it's clear that this business model works. As long as Trupanion can continue to take advantage of its veterinary-level partnerships (most pet owners learn about insurance while at their local vet office), thereby keeping its marketing costs in check, and enrolls pets at a double-digit rate, the sky could be the limit.
Another huge opportunity can be found in what we feed our companion pets. Remember, more than half of all pet expenditures in 2019 was derived from food, supplies, and over-the-counter products. This is why Freshpet (FRPT -1.52%) should be a stock given strong consideration.
Just as people have opted for fresher, organic, or natural food options for their diets in recent years, we've begun to see a distinct push for better food options for our furry friends. Freshpet prides itself on providing pet foods and treats with natural ingredients. In fact, Freshpet foods typically require refrigeration, speaking to the freshness and ingredients used.
In the company's most recent quarter, Freshpet managed net sales growth of 28.5%, with adjusted EBITDA of $12 million, an increase of 78.5% from the prior-year period. In commenting on its eighth consecutive quarter of 20%+ sales growth, the release notes that it was "driven by velocity, innovation, and distribution gains." In other words, product is flying off the shelf faster, consumers are responding well to new product offerings, and Freshpet has found its way into a larger number of retail doors. This looks to be a recipe for long-term success.
Last, but not least, consider a leading diagnostics and information-technology provider in the pet care space, IDEXX Laboratories (IDXX -0.88%).
As noted, around $17 billion was spent on veterinary care last year alone; and it's a figure that's liable to increase every single year going forward, much like healthcare costs associated with people. That's what makes IDEXX, a provider of diagnostic equipment for veterinary offices, a long-term winner.
The secrets to IDEXX's success are twofold. First, its business is built on the razor-and-blade model, which leads to higher operating margins over time. While IDEXX does generate revenue by selling its numerous diagnostic systems, a good chunk of its margins over the long haul will derive from selling testing strips and other supplies that are used frequently with its diagnostic systems. Thus, as its base of in-use systems grows, so should its percentage of high-margin revenue.
Secondly, IDEXX is able to provide a full suite of solutions through its supportive software. Being able to integrate its diagnostics with its software creates a seamless ecosystem that expedites decision-making in the vet's office. Though IDEXX's stock isn't cheap, a consistent, low double-digit growth rate isn't out of the question.