PetSmart: Follow Your Dog To This Stock

| About: PetSmart, Inc (PETM)

Long before analytics, every newspaper editor knew the best way to guarantee a big reaction to a story was to write about pets.

But only grudgingly.

Despite the great results, editors thought pets were not real news. And all the love the people had for their cat or dog or bird or horse? That was just cheap sentimentality not worthy of a real news gathering operation.

A lot of stock analysts and investors seem to feel the same way: Pets are not a real business. They underestimate the number of people with pets; how many pets they have; how many pets they are going to have; and how much people are willing to spend to feed, clothe and entertain their furry best friends.

That is why stocks like PetSmart (NASDAQ:PETM) so often smash analyst expectations, as PetSmart did just a few days ago. And that is why PetSmart has long been a big holding here in my conservative growth portfolio. Today, I rank it at 85th among the 3,178 stocks that I follow.

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Last December, I told the that PetSmart was still one of my favorite stocks for a tough economy. Since then, it has appreciated 35%, and that does not count the dividend of 1.0%.

For those cold-hearted readers for whom love of animals is not enough, let's look at a few numbers: Over the last 10 years, PetSmart has returned 14.3 percent per year. Over the last five years, 22.1 percent, and since last year, 42.8 percent.

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Fetch those growth and dividends, Fido.

PetSmart is currently trading at 17.2 times forward earnings. I have a five year target price on it of $134. That's significant upside from its current price of $67.37. Of course, there are no guarantees here.

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PetSmart is the largest company in the pet business. It employs 50,000 people in 1,269 stores in America and Canada. With a $7.3 billion market cap, PetSmart is expanding into Korea, as well as making even more money from its relatively new pet boarding services. And of course its online store.

For companies that want to learn how to make money from their customers over their entire lives, just check out how PetSmart does it for animals, from beginning to end.

Maybe the doggie toys cost a little bit more than the same thing at Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). But with litter to grave pet services, PetSmart has learned how to compete with these giants in a way that could be a text book example for places like the defunct K.B. Toys, whose only strategy was complaining about how they could not compete.

The most popular pet name is still Fido. It means loyal, in Latin. As long as PetSmart keeps finding new ways to make money from our best friends, and keeps confounding the analysts, I will be just as loyal to it.

Disclosure: I am long PETM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.