A peculiar side effect of the COVID-19 pandemic is that pet spending has skyrocketed over the past year. Maybe it's because we are increasingly turning to companion animals to help us navigate these stressful times, or it's these stay-at-home orders that are making us spend more time bonding with our pets.

But the fact of the matter is, there is substantial demand for everything pet-related -- especially the tools that keep them healthy. Today, let's look at three companies in this sector, Elanco (ELAN 0.74%)Trupanion (TRUP -4.01%), and IDEXX Laboratories (IDXX 0.71%), and how they can add both bark and bite to your portfolio.

Veterinarian examining cat.

Image source: Getty Images.

1. Elanco

Elanco is a pharmaceutical company that develops medications and vaccines for pets and livestock. It is launching eight new therapeutics this year for cattle, swine, poultry, dogs, and cats. Those products range from antibiotics to treatments for fleas, ticks, and heartworm.

The company expects to generate between $4.55 and $4.63 billion in sales and $1 in earnings per share for 2021. Those are both sizable increases from the $3.27 billion in sales and $0.47 in EPS it brought in during 2020. The growth is mainly due to strong demand from U.S. pet health practitioners and farmers. In addition, there was sizable demand from China, as that country began rebuilding its industrial herd count after a devastating swine flu outbreak. Over 56% of Elanco's revenue comes from abroad.

Right now, Elanco's financial situation isn't ideal. It has $6.225 billion in debt compared to just $495 million in cash. However, management plans to pay down $500 million in debt this year and achieve a 3-to-1 leverage ratio by 2023.

At the end of the day, the company only trades for 3.8 times sales and about 30 times earnings, ratios which I think signal a fair price for a stellar outlook. I'm excited that Elanco's sales and EPS are on track to grow by 41% and 113% this year, respectively. I'd highly recommend that healthcare investors who are interested in pet stocks add this one to their list.

2. Trupanion

Trupanion is a leading provider of pet insurance. Its services are rated top-tier by consumers, with an average churn rate of just 1.29% per month. It covered the lives of 862,928 pets in 2020, an increase of 33% from 2019. Consumers pay an average premium of $60.37 per month for coverage, with a net cash flow of $7.83 going to Trupanion after deducting all expenses. Last year, its revenue increased by 31% over 2019 to $502 million. The company broke even in terms of net income, which was roughly unchanged from last year.

Overall, Trupanion's potential lies in the long term. Its average pet insurance policy generates $606 in revenue over the policy's lifetime while having an all-inclusive cost of $272 per pet. This yields an internal rate of return of 35%. I think it is reasonable to pay 5.6 times revenue for such a tremendous growth rate. Even before the pandemic, pet insurance coverage was increasing, up 23% per year to 2.52 pets insured million in 2019.

3. IDEXX Laboratories 

Trading at 15 times revenue, IDEXX Laboratories' stock is the most expensive one on our list. But it has what it takes to justify the higher valuation. IDEXX is currently one of the largest suppliers of veterinary diagnostic equipment. The company offers laboratory testing devices, rapid assays, water/microbiology testing consulting services, diagnostic instruments, and software. Such tests can detect almost everything from hereditary diseases to solid tumors within pets.

Last year, its revenue and EPS grew by 12% and 37%, respectively, to $2.7 billion and $6.71. This year, the company expects to take those metrics further, expecting up to $3.12 billion in revenue and $7.71 in EPS. The company leads the second biggest diagnostic device manufacturer in the sector by a wide margin. Keep in mind, the entire global companion animal diagnostic market is only worth about $3.8 billion this year. IDEXX pretty much has the reins over a worldwide monopoly.  

As pet clinical and wellness transactions pick up everywhere in the nation, IDEXX is probably your best bet in the industry. Its stock has already doubled over the past 12 months. With substantial growth and a great product selection, IDEXX is definitely the top pet diagnostic stock to buy now.