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Which Retailer Is on the Rise?


Hint: It will be added to the S&P 500 Index tonight taking the place of Sunoco.


Back in March 2009, when the market was plumbing its depths following the financial crisis, we took a look at the battered retail sector.

We didn't share the view of the many doom-and-gloomers who were predicting the sector's demise. While lower housing prices and stock values, as well as tighter credit markets, would put a crimp in consumer spending, there was a behavioral shift going on-and retailers that could compete aggressively on price or offer unique products or services that encouraged repeat visits would be the ones left standing.

One stock that nicely fit the bill was PetSmart (NASDAQ:PETM), which operates 1,200 pet-supply stores in the US, Puerto Rico, and Canada.

The company's services are what sets it apart from other pet stores. For example, its PetsHotel service, which it offers at 194 PetSmart stores, boards pets while owners are away. PetSmart also offers Doggie DayCamps, which keep dogs entertained for the day, as well as grooming services and dog-training classes. In addition, 770 PetSmart stores contain veterinary hospitals.

PetSmart's new services and its strong performance through the market crash prompted us to recommend the stock. It turned out to be a prescient call: on the day the article came out, PetSmart closed at $18.06. Today, it's trading around $68.89, for a 281% gain.

And the rise has been as steady as they come: PetSmart's volatility is remarkably low. Its beta rating is just 0.78 (with a rating of 1 being equal to the market as a whole).

Joining the S&P 500 Now
Now the stock is about to achieve another milestone. After the markets close tonight, PetSmart will be added to the S&P 500 Index (INDEXSP:.INX), taking the place of oil and gas company Sunoco (NYSE:SUN), which has been taken over.

That's a plus for PetSmart, because its addition to the S&P 500-which is widely considered to be a key bellwether for the US economy-will attract more attention to the stock, including that of large institutional investors. PetSmart shares could also gain it a near-term lift because exchange traded funds and other investments that track the S&P 500 will add them to their holdings.

But even more important, PetSmart is in a great position to profit from another key trend: ballooning spending on pet supplies.

PetSmart Best in Show
The amount of money Americans are spending on their furry and feathered friends continues to surge, despite the weak economy.

In 2011, it added up to $50.96 billion, according to a recent Huffington Post article. That marks a new all-time high, and the first time the figure has crossed the $50 billion threshold. And there's no sign of a slowdown, with $53 billion in pet-related purchases expected this year.

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No positions in stocks mentioned.
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