Costco Wholesale Corporation (COST)

Bricks and mortar retail in general has been under pressure all year. He has focused on Internet retailers such as Amazon (AMZN-Q). However, he does have a small holding on this one. It has a pretty defendable position in the big box club stores. Just dropped 10%, and he is not happy to see anything drop that much. This is basically trading right on its 200-day moving average. When Amazon acquired Whole Foods, every retailer within shooting distance, got taken out to the woodshed. He would use a 200-day moving average as a Stop. In the short run, there was a knee-jerk rejection, and some companies will likely rise out of that. Feels this company is less likely to be hurt than some of the other big grocers.

He likes it. A good bottom line and trading at a decent valuation, close to breaking out. It is close to hitting an all time high. People love the experience and they think they are getting a deal.

A great franchise. Doing very well in North America and in their expansion plans elsewhere. Has never owned this. Has a forward PE ratio of about 28-29 times, which is at the high point of its 10-year historical average. That concerns him a little. It has a growth rate of about 10%, so you are looking at a stock that is rather expensive when looking at the PEG ratio. It continues to move well in price action, but from a valuation standpoint, you want to be careful and look at other names instead.

What you need to know when buying a stock in the retail sector is how they are going to be affected by Amazon (AMZN-Q). Amazon is changing the world as we know it. Costco is a company that can and does compete with Amazon on price. He likes this company, but there is another name he likes better. (See Top Picks.)

The valuation is not the greatest thing ever. They have a most beautiful business model. There is still lots of runway for them to grow. He cannot pay 35 times earnings, however.

A great franchise, but valuations are a bit stretched at almost 28X forward earnings with a 10% growth rate. This gives you a 2.7 PEG ratio, which is a bit expensive. They are raising membership fees. There is deflation in food as well as in electronics, which is a challenge for a name like this.

They have done quite well. They have an interesting business model. They make their money on memberships, not on margin. It is a bullish chart. It is a buy given their recent breakout.

This model is fantastic. Basically, they make nothing on the merchandise they sell and 100% of their profitability comes from membership fees. Retailers are out of fashion right now, especially brick and mortar ones, because of the new age of ordering online and e-commerce as well as border tax implications. Only about 25% of their merchandise comes from outside the US borders, so they are somewhat insulated. People pay up for it, so the PE is somewhere in the high 20s. If they continue doing what they are doing, a mid-20s multiple is reasonable. He would not be comfortable paying this multiple for his clients.

An outstanding business model. It is e-commerce resilient. The unit economics are very, very strong. A very durable moat type business. They make a ton of money on membership fees, and are about to increase them in July, which will be a nice earnings tailwind. However, it always comes back to what you want to pay for it. He is waiting for a better entry point. Dividend yield of about 1.1%.

One of the leaders in the low-cost space. Their margins run at about half of what their competitors do. That model only works if there is high turnover of your products. They have been successful in picking the right products, pricing them and moving them very quickly. The risk is, if you do get into a slowdown, there really isn’t any room to cut prices. They generate about 25% of revenue from membership fees, and with so many members, it is difficult to grow revenue. Membership fees are going up, which is a way to have that side of the business stay strong. Trading at about 29X Price to Earnings. For him, the dividend trajectory growth is not there, and trades too rich for him. Dividend yield of 1.1%.

Pricey. Trading at 27X forward earnings with about a 10% growth rate. He would avoid this at this time. Some of the headwinds include needing to make investments in new stores, as well as some of the higher wages that they will need to start paying.

If you have to own a retailer this would be one to look at. There is a small group of stocks that are surviving in retail. The whole industry is going through a change. But he thinks there are other areas in the market that look better. It pays a 1% dividend.

A retailer that continues to do very well. They had some hiccups in 2015 where they had some earnings hits. A low volatile name. Suffering a little bit of rotation problem right now, because people are getting excited about the more highflying names, but every time this pulls back, generally speaking it has been a good time to buy.

The low-priced leader, and is reflected in their numbers as margins are about half of their competitors. That model only works if there is high turnover and it is a margin game on each unit. The challenge is, there is no buffer to reduce prices should inventory stay on the shelves. They have done a great job at picking the right items to get them off the shelves quickly. About 25% of revenues comes from membership fees, and they have a 90% renewal rate. Their ability to grow is somewhat limited. This will always be expensive, so if you are a value investor, you would generally not go into this.

A great brand. What might hold it back is valuation. Trading at about 27X forward earnings, which is a bit rich. EPS is growing at about 10%, which is pretty decent. Their renewal rate is phenomenal, and 90% clip in North America, and 88% outside of North America.