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Pet Stocks Fetch a New Rally

19 November 2014 in Trading Ideas

Some of Wall Street’s biggest investors appear to be animal lovers.

Bill Ackman, whose Pershing Square hedge fund made a big splash earlier this week helping to finalize Valeant Pharmaceuticals’ purchase of Botox maker Allergan, has taken an 8.5% stake in veterinary medicine maker Zoetis, which was spun off from Pfizer.1

According to the New York Times, Pershing Square paid $1.5 billion for the stake.

Of course, Ackman’s real love is his likely attempt to profit on the deal, and early speculation suggested that Ackman would work with fellow activist hedge fund Sachem Head Capital to force a sale of the company.

However, Ackman is not alone among investing heavyweights in having the animal-health sector on their radar.

Glenview Capital founder Larry Robbins recently touted the stock of animal hospital operator VCA Inc. as part of his “Millennial” investing theme. According to his thesis, the cyclicality of birthrates means that they are typically negative during major economic and geopolitical events. Because of the recent financial crisis, Millennials have deferred having kids, owning a pet and buying a house in their mid-20s to their mid-30s, Robbins said. A recovery in the US birthrate, though, could benefit industries like hospitals, pet ownership and home ownership, according to Robbins.

Having two investing “bigs” show support for the pet sector recently certainly hasn’t hurt overall pet stock performance. The Pet Passion motif has gained 16.5% in the past month. In that same time, the S&P 500 has increased 8.4%. So far this year, the motif has risen 16.1%; the S&P 500 is up 12.4%.

Dedication to spending on pets in the US shows few signs of waning. Earlier this year, the American Pet Products Association said that Americans spent an all-time high of $55.7 billion on their pets in last year – and it expected spending to creep close to $60 billion this year. According to AAPA President and CEO Bob Vetere, pets across America live like “little humans” these days – and as long as people treat them that way, pet spending should keep climbing.

Meanwhile, supporting the thesis that pet spending is virtually recession-proof, the APPA said that overall pet spending has never dipped since record-keeping started in 1994. Such spending is even moving beyond traditional food and kitty litter. A Bloomberg report earlier this week revealed the huge surge in pet insurance — a $600 million industry in North America growing at triple the pace of U.S. accident-and-health coverage, and drawing investment from companies including Toronto-based and Nationwide Mutual Insurance Co.

Bloomberg noted that gross written premiums in-force jumped an average 13% annually from 2009 to last year according to data and forecasts compiled by the North American Pet Health Insurance Association, the group whose members account for 85% of the industry. That compares with the average 3.5% annual rise in premiums for personal accident and health policies in the US in the period.

A dog’s life, indeed. To see just how much Americans are spending on their pets check out the infographic below from the folks at Dog Breed Identifier.

Cost of Pet Ownership