Let Fido Sniff Out Winning Pet Stocks

Last year, an octopus named Paul proved quite adept at predicting winners in the FIFA World Cup. While his stock-picking prowess never was tested, his skills do suggest an interesting idea for investors -- consulting the domesticated animal kingdom for investing ideas.

It's not as far-fetched as it might sound: Historical returns have shown that growth in pet products has proceeded at a steady pace. And more than half of households have a built-in product focus group -- a furry, fuzzy or scaly pet that is probably more than eager to test the latest and greatest pet products.

Want to throw your portfolio a bone? Follow your dog's nose and see what pet products make his tail wag in delight.

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The cost of unconditional love

According to the American Pet Products Association, Americans spent $48.4 billion on their pets in 2010, and as of 2008 more than 62% of households owned at least one pet.

Almost $20 billion of that amount was spent on pet food, $14 billion on veterinary care, and $11 billion on supplies and over-the-counter medicine, according to the APPA. These revenue figures have nearly tripled since 1994 and are even more reason to consider investing in the pet products sector.

Cashing in on Fido and Fifi

Pets.com is long gone, but thankfully we're left with a few highly profitable places to dig for investment opportunities:

Source: Yahoo! Finance.

Note that all of these companies have strong double-digit growth expectations, yet none are trading at a ridiculous valuation. As gravy, PetMed Express pays a very delectable dividend -- currently yielding north of 4% -- while PetSmart also pays out 1.2%, a figure I predict could rise in the coming years given its dividend growth rate of more than 100% in the past two years.

Also, don't discount what owners are willing to do to ensure the health of their four-legged family members. A typical visit to the vet usually costs hundreds of dollars and translates into healthy margins for pet companies like MWI and VCA Antech, which supply various products to veterinary clinics.

Big retailers hopping on the gravy train

The appeal of high-margin pet products is even attracting large names that want a piece of the pie. Wal-Mart (WMT), Target (TGT), and online retailer Amazon.com (AMZN) have expanded the amount of pet food and toy products they carry in the hopes of cashing in on this high-margin gravy train.

Have you bought into the pet products sector because of the animals you own? Share your thoughts in the comments section below.

Motley Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He regularly consults his obese dachshund for stock advice. The Motley Fool owns shares of PetMed Express and Wal-Mart Stores.