This FTSE 250 dog might be a stonking contrarian pick

Shares in pet products retailer Pets At Home (LSE: PETS) have been in the doghouse of late, falling by a third in value over the past year alone thanks to concerns over rising inflation and growing competition (particularly from German-based rival Zooplus).  

Based on today’s warmly received trading statement however, I think the shares could be a great buy for patient contrarian investors. Here’s why.

Positive start to the year

In the 16 weeks to 20 July, group revenue at the £860m cap rose 5% (2.7% like-for-like) to £257m. Importantly, there was a 2.8% rise in previously-flagging merchandise sales with the company reporting “good progress” with initiatives including price cuts on specific brands and a reduced reliance on short-term promotional discounts.

Elsewhere, the company’s Services division continues to do well with revenue climbing almost 19% (10.5% like-for-like) to £40m. Its veterinary practice joint venture has seen further positive momentum, helped by “excellent performance” from its specialist referral centres and TV campaigns promoting its ‘Best Start in Life’ care plans.

Pets reported “strong” omnichannel revenue growth of 80% with 60% of its revenues involving colleague assistance or the use of one of its stores, five of which were opened over the reporting period. The company proceeded to say that it was “on track” to open around 10 superstores, 40-50 vet practices and 40-50 grooming salons over the 2017/18 financial year.

With the profit outlook for the full year remaining in line with expectations, it’s perhaps not surprising that shares rallied 8% in early trading.

While some investors may believe they’ve already missed the boat, I don’t think this is the case at all. Trading on a forecast price-to-earnings (P/E) ratio of 13 for the current year, the share price still looks too low, even if much still depends on the company’s ability to continue protecting its market share over the coming months. While investors await a full recovery, there’s a juicy 4.4% yield to tide them over.  

Strong US growth

Those attracted to the defensive nature of stocks focused on our love of furry companions, but concerned by the possibility of reduced UK consumer spending, may want to check out veterinary drugs business Dechra Pharmaceuticals (LSE: DPH) as an alternative. 

In July’s update, the 20 year-old company said that trading in the full year has been “strong and in line with expectations,” adding that its core business had been supported by the successful integration of recent acquisitions including specialist US speciality drugs developer Putney. Group revenue increased by 28% at constant exchange rates, including an encouraging 93% rise in revenue at its North American division. 

In addition to these numbers, £1.7bn cap Dechra successfully registered “numerous” new products over the reporting period, including approval for a generic antibioic called Amoxi-clav — its first major development from the Putney pipeline. The company also secured approval for a variety of other products in countries such as Mexico, Canada, Australia and throughout the EU.

Thanks to its growth potential and earnings diversification, it’s no real surprise that shares in Dechra currently change hands on almost 29 times forecast earnings — a far higher valuation than those of Pets At Home. Nevertheless, if pre-tax profit predictions of £83m for next year are met, this might just be another example of how paying an initially high price for a stock might still be worth it. 

Buy the dips

Buying decent companies on temporary share price weakness is just one strategy that has been shown to generate substantial wealth for patient investors over the long term.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.