One of my favorite ways to add money to my portfolio is to invest in proven composite companies with track records of delivering market-beating results after short-term downturns. This idea is especially true when the stock in question is trading at once-in-a-decade opportunities.
Two companies that now meet this description are specialists in animal health care Idexx laboratories (NASDAQ: IDXX) And Zoetis (NYSE: ZTS). While Idexx is already one of my daughter’s core interests and Zoetis one of mine, I strongly agree that adding your long-term winners over time is a high-performing proposition – an idea embraced by David Gardner, co-founder of Motley Fool.
Idexx and Zoetis are currently down 37% and 28% respectively from their all-time highs, but they’re still beating the S&P500 based on total returns over the past ten years. Here’s why investors should consider picking up these two great S&P 500 stocks as we head into 2025.
The Bureau of Economic Analysis estimates that people in the United States will have spent a total of $186 billion on their pets by 2023. This figure has roughly doubled since 2014, highlighting the “pet humanization” megatrend that should propel these two stocks to new highs.
Idexx Labs should benefit from this thanks to its leadership position in pet healthcare diagnostics. With an installed base of more than 144,000 instruments worldwide – a metric that grew 10% year over year in the last quarter – Idexx’s offering detects a wide range of ailments facing our furry friends.
What makes it a top stock to consider is that the company has built a powerful razor-and-blade model. The large base of installed instruments forms the ‘razor’. This allows it to generate recurring purchases of products such as test cartridges, reference laboratory guidance (i.e. assistance in interpreting test results), consulting services and software subscriptions. These “blade” sales account for 80% of Idexx’s revenue.
Driven by the stability inherent in this model, Idexx shares have enjoyed a lofty valuation, trading at an average of 67 times free cash flow (FCF) over the past decade.
However, as revenue growth slowed from over 20% at the height of the pandemic-induced pet adoption boom to below 7% today, the company’s price/FCF rating has fallen to below 47, a level it hasn’t seen since. 2016.
I believe this much more reasonable valuation helps make the stock a once-in-a-decade investment opportunity as Idexx focuses on its newest growth market: oncology. It plans to expand its cancer testing panel over the next three years to detect about 50% of cancers in dogs.
With pet owners consistently opting for early cancer detection rather than being stuck with after-the-fact treatment, its expansion into this $2.5 billion market seems like a win-win for everyone involved.
And don’t just take my word for it that Idexx stock looks promising. Management recently announced that it will be adding an additional 5 million shares to the share repurchase authorization, up from 1.3 million shares previously remaining. The company has about 82 million shares outstanding, so this buyback could help significantly boost the stock price, which is down 37% from its high.
While Idexx is the leader in animal health diagnostics, Zoetis is the top dog in medicines, vaccines, genetic testing and precision health products for pets and livestock. The animal health giant generates 90% of its revenue from categories in which it considers itself a market leader.
What makes it such a promising investment is that its dominance comes not just from one or two drugs, but from fifteen separate “blockbusters” that gross more than $100 million each year.
But – for the same reasons that applied to Idexx – Zoetis saw its revenue growth skyrocket to over 20% in 2021, before dropping to a minimal increase in 2022. That flattening of the growth trajectory prompted the market to downgrade Zoetis’ valuation to decrease dramatically. . Today it trades at 35 times FCF – well below the ten-year average.
Currently at its lowest price/FCF valuation since 2019, and with a dividend yield of almost 1% – just below an all-time high – Zoetis also looks like a unique opportunity.
And the dividend looks completely sustainable. Because the company uses only 33% of its free cash flow to fund its payouts, Zoetis should easily be able to raise its dividend for the twelfth consecutive year – and beyond.
Best of all for investors, the company is seeing huge success in the osteoarthritis market with its new Librela pain medicine for dogs and Solensia for cats. Sales of these two medications grew a combined 97% in the company’s most recent quarter and are becoming popular options for pet owners looking to ease the pain of their furry companions.
With the average life expectancy of dogs and cats increasing by 1.3 and 1.9 years respectively since 2010, osteoarthritis will only become a more common condition in pets, increasing the market for these medications.
Zoetis is down 28% from its 2022 all-time high, pairing perfectly with Idexx to form a duo of S&P 500 pet healthcare stocks poised to outperform the market for years to come.
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See 3 “Double Down” Stocks »
*Stock Advisor returns December 9, 2024
Josh Kohn-Lindquist holds positions at Idexx Laboratories and Zoetis. The Motley Fool holds positions in and recommends Zoetis. The Motley Fool recommends Idexx Laboratories. The Motley Fool has a disclosure policy.
A Unique Opportunity: Two Beautiful S&P 500 Stocks Down 37% and 28% to Buy Before 2025 was originally published by The Motley Fool
