
NASDAQ:COST
A great business, but she is more neutral on the name. As much as it is a good business, it is suffering from a bit of the same dynamic as retail sales across the US. Not sure where the incremental growth is going to come from. She would be looking for something with a more favourable risk/reward dynamic.
Retail is another area he really likes. Some of the discounters are really attractive. COST-Q is a strong stock within the group. It is likely to put up good numbers. Technically when you go through a correction like this, you should look for things you want to own. He looks for companies that bottom when the first low takes place but don’t retest it when the rest of the market does.
The share price has been suffering. However, long term he expects they will continue to capture market share, especially with the economy improving. The issue is that the stock is trading at 26X forward PE, with an expected 10% long-term growth rate. This puts it at 2.6X Peg Ratio, which is rather high. There are some foreign exchange headwinds, as 30% of its revenues come from international markets. He would prefer the dollar stores at this time.
When you look at this and how they are different from some of their competitors, they are the low-priced leader. This is a high turnover model in terms of things sitting on their shelves, so they discount them compared to their competitors. When you own a name like this and things slow down, because their pricing is so aggressive they don’t have much of a buffer to cut prices. That can put significant pressure on the stock price. The recent drop in the stock price, he feels, is because of profit taking. This is rich on a valuation basis, and the dividend yield is not worth paying that premium.
It has always been at a premium. They are a low priced leader and margins are at half the peer group. 25% of revenues are from fees from memberships and 90% of fees are from renewals of memberships. They have a dividend of 1% but he has not stepped in because the valuation is too rich.