Millennial Trends: Pets

Full disclosure: I’m not a pet person. But at times, it feels like I’m the only one who isn’t. I can’t leave my apartment building without seeing multiple people walking their dogs. They’re everywhere!

It may not be me, but I’m not blind to what’s going on right around me (which, by the way, is a great way to find good stocks). No longer are our furry little friends considered additions to our families, they’re considered part of the family. People everywhere dress them up, brush their teeth, count their calories and even celebrate their birthdays with parties and cakes. And did you know that pet health insurance is one of the fastest-growing employee benefits?

According to the American Pet Products Association, total pet industry expenditures reached $60.59 billion in 2015 – up from $58.04 billion in 2014. Americans spent $23 billion on pet food, $14 billion on supplies and over-the-counter medicine, $15 billion on vet care and $5 billion on pet services like grooming and boarding. According to the Bureau of Labor Statistics, Americans spend more per year on their pets than they do on men and boys clothing and alcohol!

And here’s one more stat that I found particularly interesting: We spend more on pet food than we do on reading materials. I don’t think my high school librarian would be thrilled to hear that one.

Whether you’re a pet person or not, one look at these numbers reveals an industry that is overflowing with investment opportunity. I like the pet healthcare market in particular. Overall healthcare spending increased 50% between 1996 and 2012, but healthcare for pets increased 60% – although keep in mind this started at a much smaller base.

This niche market has actually been around for decades – Lassie, the famous dog TV star, received the first pet health insurance policy in 1982 – but it’s still relatively new for pet owners. Only about 1% of dogs and cats are currently insured, but with the numbers increasing and emotions driving higher spending in the pet industry in general, I suspect there is still plenty of upside here.

The fact that the number of veterinarians has increased 100% over the last 20 years only confirms my thinking here. Routine vet checkups cost pet owners a couple hundred dollars per year, but more serious conditions can turn out to be very expensive. For example, a dog’s kidney transplant can run up to $25,000, or a cat’s cancer treatment can cost $10,000. Even if such high costs are not the norm, it’s not uncommon for a pet owner to be saddled with a $2,000-$4,000 doctor’s bill at some point.

A health insurance policy can help manage those expenses, just like it would for a human, and pet owners appear to be coming around to the idea of it. The industry is already growing, with total premium volume up about 17% in each of the last two years.

At the moment, two companies stand out to me as potential opportunities within the pet sector. The first is Central Garden & Pet Company (CENTA), which makes a ton of pet products (from bones to toys to pet carriers and just about everything in between). While it also operates in the lawn and garden industry, the pet segment accounts for more than 60% of total revenue. The stock has exploded in recent years (up 150%+ since the start of 2016), and I expect that momentum to continue as the industry as a whole expands. That makes the buy and sell points all the more critical to making money and managing risk.

I’m also keeping my eye on Trupanion (TRUP), a leading provider of medical insurance for cats and dogs in North America. The company’s insurance plan covers 90% of vet costs, and I suspect it could be a leader as the pet healthcare market really gets going. It’s a smaller company with fewer shares trading each day, so you do have to be a little careful, but there are ways to manage that.

One final note on the pet industry before I leave you today: the sector is virtually recession-proof. While Americans cut back on spending and tightened their belts when the Great Recession hit, spending on pets barely declined at all! Now while my outlook on the market remains bullish over the long term, it’s always nice knowing our investments are cushioned in the event the indices decide to take a breather.

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