Costco Wholesale Corporation (COST)

A great company. On his watch list. When he bought it, it was at the lower end of its valuation range. It is currently in the middle of the range. One of the few retailers that can generate really respectable same-store sales.

He doesn’t like the sector. A lot of the hit came from the Amazon acquisition of Whole Foods. This company probably has the most defensible business model of the group. Technically it broke down and is in a negative group for him, so he wouldn’t be there. There are a lot of headwinds coming.

Amazon acquisition of Whole Foods could change the landscape for all retailers, however, it hasn’t happened yet. The acquisition is years away and it has to get through regulation. In the meantime, this company is performing financially, and nothing has changed in their unique story. The drop in price is parabolic to the downside and this is a good entry point. (Analysts’ price target is $185.)

Thinks this is feeling the Amazon (AMZN-Q) affect. Every retailer known to man is at a 52-week low now. It doesn’t matter if you are the most successful retailer like this company or the crummiest one, you are just getting beaten up. There is not enough margin of safety in their evaluation for him to get excited. At 25X earnings, it is certainly a lot cheaper than it has been.

A wonderful retail story which has done really, really well. Like many retailers, this has come off with Amazon (AMZN-Q) taking over Whole Foods (WFM-Q). Not sure the people that shop at Whole Foods is the same demographics of those who shop at Costco, and feels this would be a buying opportunity.

Not a big fan of staples right now, however this one is a little different. It falls into a bond proxy sector. With higher yields, that should and has been harder on bond proxies like utilities, telecoms and staples. However, this one is different. Its model is the most defensible against something like an Amazon (AMZN-Q) incursion. Ultimately though, you are swimming against the tide in the sector. This is a good company and a bad stock.

Can this compete with Amazon (AMZN-Q)? If there is one name that can compete with them, it is this one. They are able to cross sell products. It is one of the few retailers that has done exceptionally well. Trading at around 28X PE, which is expensive, but continues to set new highs and go higher. Dividend yield of about 1.25%. A tough place to be if the stock goes sideways. About 25% of revenue comes from membership fees, which is a little bit of concern, because with 80 million members, how much more can they grow in this area.

The world’s 2^nd largest retailer by revenue, and operate over 700 stores and warehouses globally. They have 90 million member cardholders. He doesn’t believe the acquisition of Whole Foods by Amazon (AMZN-Q) will change the game that rapidly for this company. Renewal rates are 90% in North America and 88% outside of North America. They need to improve their online revenues which are still in single digits. Dividend yield of 1.3%. (Analysts’ price target is $185.37.)

Retailers in general have been pretty stressed. They continue to miss earnings, and are hurting because of Amazon (AMZN-Q). This one is not quite in the same category as they have a bit of a moat. They are the leader in the membership model of large packaging and deeper discounting. Trading at a pretty good valuation. Good ROE’s up 22%. OK on a PE basis. Thinks this will be one of the survivors.

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.