Costco Wholesale Corporation (COST)

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.

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.