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Top Five Animal Care Stocks

This past week on "Mad Money," Jim Cramer broke down a lot of names we often hear such as Procter & Gamble (PG) and Wal-Mart (MWT), but he also highlighted Idexx Labs (IDXX), which he called "the Costco (COST) of pet stocks."

That description prompted me to create a portfolio on Stockpickr of the Top Five Animal Health Care Stocks.

According to an August 2007 Business Week article, Americans spend an estimated $41 billion per year on their pets, and that figure is expected to grow at a compound annual growth rate of 12.3% for the next two years. Animal farm-care costs are about $25 billion and are rapidly growing, according to Congress' Office of Technology Assessment. To help prevent these rising costs, animal scientists are using biotechnology to develop an array of products to diagnose, treat and prevent disease in animals.

One of the most interesting areas is animal biotechnology, which has already had a profound impact on diagnostic testing. Many animal diseases are difficult to diagnose, and veterinarians often have to wait hours or days for laboratory results to confirm a diagnosis.

However, I am much more comfortable playing this trend with animal retailers and other service-oriented companies instead of investing in the more risky (yet potentially more rewarding) biotech companies.

First up is PetSmart (PETM), a retailer that also provides services in a wide market of animal care, including grooming and bathing. Also interesting here is that it also offers veterinary care services, including examinations and vaccinations, dental care, a pharmacy and surgical procedures.

With PetSmart trading near its 52-week low, and with quarterly revenue growth of 7.8% and a forward price-to-earnings (P/E) ratio of 12, the stock is a great buy here. Despite being in the midst of upgrading its warehouse management system, Goldman Sachs analyst Matthew Fassler said, "PetSmart's long-term appeal is considerable, given its niche, services business, and ongoing growth trajectory." Fassler reiterated his $34 price target in his report.

Next up is PetMed Express (PETS), which engages in the marketing and sale of prescription and nonprescription pet medication and other health products for dogs, cats and horses. Near its 52-week low, PetMed stock offers the best reward out of all of these picks to investors.

PetMed has in place a $20 million share-buyback -- just under 10% of its market cap -- and a 15% short position . The company has $55 million in cash and zero debt.

The past two quarters the company has solidly beaten analysts' expectations both on the top and bottom lines, thus PETS could be due for a snapback. In an article for the Web site Small Business Trends, the CEO of Embrace Pet Insurance predicts, "Online veterinary pharmaceuticals will become more main stream."

To see the entire portfolio of pet stocks, check out the Top Five Animal Health Care Stocks at Stockpickr. Other stocks that make this list are VCA Antech (WOOF), which has a forward P/E of 25, and Heska (HSKA), which lately has seen insider buying.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Heska and PetMed Express to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is president of Stockpickr LLC, a wholly owned subsidiary of TheStreet.com and part of its network of Web properties, and a managing partner at Formula Capital, an alternative asset management firm that runs a fund of hedge funds. He is also a weekly columnist for the Financial Times and the author of Trade Like a Hedge Fund, Trade Like Warren Buffett and SuperCa$h. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.

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