Blue Buffalo: Well-Fed Pets

06/09/2016 7:00 am EST

Focus: STOCKS

Briton Ryle

Editor, The Wealth Advisory

A record number of American households (70%) now own at least one pet. And in 2015, Americans spent $60 billion on their pets; that’s 25% growth in just five years, explains Brit Ryle, editor of The Wealth Advisory.

Americans are spending millions of dollars at specialty retailers in order to give their animals the healthiest nutritional options — sometimes even those who don’t even buy natural products for themselves.

And there’s one publicly traded company out there that’s capitalized on this trend better than any other — Blue Buffalo Pet Products (BUFF).

The firm was founded in 2002 by a family whose dog -- named Blue —had dietary restrictions; the new company set out to make pet foods using only the highest quality natural ingredients.

Consumers have responded in astonishing numbers, sending Blue Buffalo revenues soaring an average of 25.7% per year over the past three years and elevating the stock price by over 40% in 2016 alone.

Blue Buffalo reported first quarter earnings in May and made analysts and short-sellers look foolish once again by beating across the board. Earnings were higher than expected, revenues were up over 10%, and full year guidance was raised.

There are risks; Blue Buffalo settled a class action lawsuit initiated by one of its competitors. The company singled out one supplier (who sells to numerous pet food manufacturers) that was mislabeling products. The stock has recovered from the shock of these allegations and the ensuing settlement.

Another issue with the stock is its valuation — this is not a cheap company. It’s trading at a P/E well above the industry (53 compared to 40).

Despite these risks, I’m still convinced this is one of the most solid long-term investments in the market right now.

And don’t rule out a bigger company snapping BUFF up — it is exactly the kind of company and product that bigger rivals will covet.

We think this is an ideal “buy on weakness” situation. Over the long term this is a company that stands to make smart investors incredibly happy (and their pets incredibly healthy).

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By Brit Ryle, Editor of The Wealth Advisory

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