Costco Wholesale Corporation (COST)

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.

This has done well since the election, but it is expensive. It is trading up in the 30s on a multiple basis, and it is hard to justify that. You might get 10% from here, but it will be a riskier 10%. He would be tempted if this dipped substantially. Dividend yield of about 1%.

A great business. You are very protected from the Ecommerce threat. They have enormous amounts of purchasing power. They make a huge amount of their profit through the member fees. It is a very defendable business. He wants to own it but is being patient about the price. We are not too far off.

You want to be selling retail at the Thanksgiving holiday. There can be a bit of positive in December, and this one probably has a bit more life than the retail sector itself. It doesn’t have the tendency to fall off like the broader retail sector does. He would continue to Hold. Looking at the technicals, there is reason to be optimistic. You could see higher prices from here.

A great company. Long-term track record of great returns. Very consistent. However, the stock has run up and it is just starting to turn over a little. He would like to own this company, but at a lower price, and thinks he will get that opportunity.

The metric he likes most when it comes to evaluating stocks is the free cash flow yield, and this company has a tremendous one. He doesn’t own it because they don’t pay a very good dividend. Prefers Walmart (WMT-N) which has a free cash flow yield of almost 10%, and a dividend yield of about 3%. If you want to own a stock for appreciation, and not collect the dividend, Costco would work.

It is a hit on all cylinders. It is a cult. It trades at 1.5 times what the market normally trades at. There was some slippage in same store sales growth. They are over building concerns. The model is to make no money on goods and all of it on membership. He would pass given the valuation.

We are in the period of seasonal strength right now, so continue to hold if you own it. Retail stocks like this have very precise timing for when you want to take your profits. They do very well until Black Friday, the last week in November. After that you want to take profits.

An excellent executor of the business model. Sold his holdings mid-summer. This has a seasonality, and the whole space has some pretty big weakness in August. He would probably look to buy this back in November. If you can get it at around $135, you are probably getting a pretty good price.

He is not a fan of bricks and mortar retailers, but this company has a great brand and has demonstrated excellent long-term growth. His concern is the valuation. The free cash flow yield approximates 3% and it trades north of 20X earnings. He would be more compelled to Buy if it pulled back by 15%. A very defensible business, as two thirds of the revenues really accrue from the memberships they sell.

It has been going sideways for a year. It came down quite a bit recently. The long term support is at $140 going back about 2 years. If we trade below it, you have a potentially major top. We were not able to take out the previous high recently. Don’t touch it. It is not acting well.

(Market Call Minute.) This always tends to trade at a premium to the market, high multiple. Valuation is just too rich to buy it.

There is a difference between a great stock and a great business. This one is a great business, probably one of the best in the world. That tends to result in a high priced stock. The long-term chart tells you that you are going to be fine. There is still lots of room for them to grow.