For investors, this industry growth is creating some lucrative opportunities. With that in mind, here’s a look at some of my top stock picks in the petcare sector for 2021 and beyond.

UK pet care stocks

Here in the UK, there are a number of petcare stocks listed on the London Stock Exchange. Two names that come to mind are Pets At Home, which is a pet-focused retailer, and CVS Health, which operates vet clinics across the UK.

Both of these companies are growing at a healthy rate right now. However, they don’t strike me as ‘strong buys’. Every time I visit a Pets At Home store, I walk away unimpressed with the offering.

Meanwhile, CVS generates a low return on capital (5.1% last year) and has quite a bit of debt on its balance sheet. All things considered, I think there are better ways to play the petcare boom.

Terry Smith owns this stock

One stock I do like in the space is IDEXX Laboratories (NASDAQ: IDEXX), which is listed in the US. It’s the leading global manufacturer of diagnostic tests for the vet market. IDEXX operates a ‘razor-and-blade’ model with an installed base of about 60,000 systems in vet clinics and reference labs. These systems generate steady recurring revenues because customers are required to continually buy test consumables.

IDEXX is a really impressive company, in my view. Not only does it have a great revenue growth track record (five-year growth of 69%) but it’s also very profitable. Over those last five years, return on capital has averaged 26%, which is excellent. I’m not the only one who’s impressed by this company. Terry Smith (aka ‘Britain’s Warren Buffett’) also likes the stock – currently it’s the third largest position in his Fundsmith fund.

One downside to this stock is that it’s very expensive. Currently, its forward-looking P/E ratio is about 65. This means it’s priced for perfection. I’m comfortable with the risks however, given IDEXX’s dominant position in the industry and high level of profitability.

The Amazon of pet care?

Another petcare stock I’d buy today is Chewy (NYSE: CHWY). This petcare-focused online retailer also operates in the US. Through its website, consumers can purchase pet food and treats, pet supplies, and pet medications.

I see e-commerce and petcare as a great match. Online shopping gives pet owners exactly what they want. Convenience, a wide range of products (food, treats, toys, furniture, etc), product information, and pricing comparisons.

Chewy is growing at a fast pace. For the year ended 31 January, sales rose 47% to $7.1bn. Looking ahead, I expect the company to keep growing rapidly as consumers realise how convenient online shopping for petcare products is. This year, analysts expect the company to generate sales of $8.95bn – growth of around 26%.

One risk to be aware of here is that the company isn’t yet profitable. So, the stock could be volatile in the short term. Competition from rivals such as Amazon is another risk to consider. Overall though, I think this petcare stock has a lot of potential in today’s digital world.

PayPal

The first stock I bought in March was PayPal (NASDAQ: PYPL). I took advantage of the sell-off in the tech sector to add to my holding, buying more shares at a price of $235 per share. After this top-up, PayPal is now the seventh-largest holding in my portfolio.

There are a number of reasons I’m bullish on PayPal. One is that I expect ‘digital wallets’ to take off in the years ahead as the world moves away from cash. As a leader in this space and trusted by millions, PayPal should benefit.

Another is that the company looks set to benefit from the growth of e-commerce. It’s worth pointing out that when retailers offer PayPal as a payment option, conversion rates (sale completions) tend to be much higher. So, I expect to see more retailers embrace it.

PayPal is an expensive stock, even after its recent share price pullback. Its forward-looking price-to-earnings (P/E) ratio is a little over 50. This adds risk to the investment case. If growth slows, the stock is likely to fall. However, I think the long-term growth story here is very attractive.

London Stock Exchange

The second stock I bought was London Stock Exchange (LSE: LSEG). It’s a leading global financial markets infrastructure and data company. It now owns Refinitiv – one of the world’s largest providers of financial markets data. I started a new position here, buying at a price of around 7,300p per share.

In today’s data-driven world, I think London Stock Exchange is well-placed to generate long-term growth. To my mind, the $27bn acquisition of Refinitiv is a game-changer as it enhances the group’s data and analytics offer significantly. That said, LSEG is set to face large costs this year as it integrates the business. 

London Stock Exchange shares aren’t cheap. Currently, the stock sports a forward-looking P/E ratio of about 25. This means if the Refinitiv acquisition doesn’t go as planned, or there are other setbacks, the stock could fall.

However, I’m encouraged by the fact that multiple directors have purchased stock recently. This suggests these ‘insiders’ are confident the stock is set to rise.

IDEXX Laboratories

Finally, I started a new position in IDEXX Laboratories (NASDAQ: IDEXX). This is a US company that specialises in animal diagnostics. I bought some shares for around $480 per share.

There are a few reasons I bought this stock. The first is that I’ve been looking to boost my exposure to the healthcare sector. IDEXX is focused on animal healthcare so it fits the bill.

Secondly, I want exposure to the pet care market as it’s growing at a rapid rate. By 2026, the global veterinary healthcare market is expected to reach $47bn, up from $28bn in 2020. That represents annualised growth of 9%.

IDEXX shares have had a good run over the last year (as pet ownership has increased during the pandemic). So, there’s always a chance the stock could experience a large pullback. Particularly when you consider the stock’s P/E ratio is in the 60s.

Given this risk, I’ve only made this a small position. If the share price falls, it won’t have a big impact on my portfolio.