Dear Reader,

Imagine a world where every pet and livestock animal leads a healthy, happy life. That’s the vision that our stock pick from today is turning into reality.

Introducing Zoetis, the global leader in animal health:

With a rich history spanning over 70 years and a stellar 500% return since its 2013 spin-off from Pfizer, Zoetis isn’t just treating animals—it’s transforming the future of animal care through groundbreaking vaccines, medicines, diagnostics, and health tech.

Let’s zoom out and look at the big picture. The animal health industry is booming, with projections showing it will grow from $66.97 billion in 2024 to a massive $117.48 billion by 2031—a compound annual growth rate (CAGR) of 8.1%. That’s a powerful tailwind for any company in the space! And Zoetis, already the dominant player, is well-positioned to ride this wave. With a presence in over 100 countries and a portfolio of 300 products, Zoetis generates $8.7 billion in annual revenue, making it a key force in this rapidly expanding market.

So, why is Zoetis crushing it? They’ve built an economic moat wide enough to keep competitors at bay. First, their portfolio of patents and regulatory approvals creates strong barriers to entry. Second, once veterinarians and pet owners start using Zoetis’s products, the switching costs are high—why change what’s working? Third, Zoetis’s vast distribution network and relationships with veterinarians deepens the moat even further.

Now, let’s zoom in on what makes Zoetis a potential market beater. Zoetis stands out as a potential market-beater due to its exceptional financial metrics. The company ranks among the top 5-10% of its industry in terms of profitability, boasting an impressive ROIC of 21.6% and ROE of 48.5%. This strong performance is driven by a remarkable gross profit margin of 70%.

While recent growth has been moderated compared to the pandemic-fueled surge, Zoetis remains a solid performer, outpacing the majority of its peers. Looking ahead, the company's growth prospects are promising, especially considering the industry's projected annual growth rate of over 8%.

Zoetis also demonstrates a commitment to shareholder value. It ranks among the top 25% of its industry in terms of shareholder friendliness, offering a dividend yield of approximately 1% and strategically timed share buybacks that have accounted for 1.62% of market capitalization over the past 12 months.

The company's financial health is robust, with annual profits sufficient to cover interest payments for 13 years. Notably, Zoetis has avoided relying on external financing to fund its growth, although it carries a significant net debt of $5.2 billion. However, this debt should not be a major concern given the company's strong financial position.

Despite commanding a premium valuation, within the top 10% of its industry, Zoetis's recent underperformance (gray area) relative to its strong fundamentals (blue line) presents a potential investment opportunity. If the company continues to deliver solid results I believe this is a situation where investors can enjoy a significant margin of safety positioning them well for when the market recognizes its true value. Based on current valuations and the company's promising prospects, an upside potential of 30-35% appears achievable. This makes it a compelling time to consider initiating a position in Zoetis.

But no success story is without its hurdles. In 2021, Zoetis saw revenue soar by over 16%, fueled by the pandemic-driven surge in pet ownership. However, as the trend normalized, revenue growth slowed to 3%. Long-term investors expected this bump, but the short-term market reacted sharply, sending the stock plummeting by 45% in 2022. While growth has returned quickly (revenue has increased by 9.71% in the last year), and while the stock has since recovered slightly (the stock is up 19% in the past two years), Zoetis remains 23% below all-time highs until it can proof that growth is returning for good. Compounding the growth challenges, Zoetis faces growing competition from generics, ongoing supply chain disruptions, and holds a significant $5.2 billion in net debt, making for a tougher environment to navigate.

So, here’s the bottom line: Zoetis is a powerhouse in an expanding industry, with a history of outperformance, strong financials, and an innovation pipeline that keeps it ahead of the pack. While there are short-term headwinds, the long-term outlook remains bright for this leader in animal health. If you believe in the growing bond between humans and their pets, Zoetis could be a long-term winner worth considering.

As always, please remember this isn't investing advice—make sure to read our ​disclaimer​. Invest at your own risk.

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3 Important Things About These Emails

1. Success Rate: Let’s set the record straight from the beginning—not every stock I pick will beat the market. I estimate around 60% will deliver positive results, and that should be enough to beat the market.

2. Selection Process: I'm not personally investing in each and every one of these stocks. These picks are mostly driven by quantitative analysis and may not always pass my qualitative tests.

3. Accountability: I’m committed to full transparency. You can track how my picks perform in real time here, and judge my recommendations for yourself.

Have an amazing week and... happy investing!