COST - Costco

[Gregmal]

Indeed...its basically a subscription business masquerading as a low margin retailer. I dont think they make lots of money on tires either, but they benefit from making their membership a necessary part of peoples lives. Gas too. Whatever they need to do to get you to their properties as often as possible.

 

 

Tangentially, a model in some ways fairly similar to Coupang...which I think is probably worth keeping an eye on.

[ValueMaven]

no one talks about COST's lack of store slippage ... only 0.1 to 0.15% of all sales are lost due to theft vs. peers.  This allows them to keep prices that much lower.  It's believed that WMT's store slippage is between 0.80 to 1.00% of all sales.  Remarkable really.  Many factors go into this - but the outcome and benefit for consumers and the company is clear. 

[cubsfan]

^ It's one of many things that make Costco so unique. Paying higher wages is also so counterintuitive - yet, these employees stick around for years and are clearly extremely loyal, happy, and go above and beyond most retailers.

 

 

[bizaro86]

no one talks about COST's lack of store slippage ... only 0.1 to 0.15% of all sales are lost due to theft vs. peers.  This allows them to keep prices that much lower.  It's believed that WMT's store slippage is between 0.80 to 1.00% of all sales.  Remarkable really.  Many factors go into this - but the outcome and benefit for consumers and the company is clear.

 

I really had a hard time with getting the receipts checked at the exit for years and years. My wife loved Costco, and I disliked it for that reason. I hate waiting in lines, and two lines (one to pay, one for receipt check) to leave the store felt unreasonable to me. I understand why they do it, and the value proposition is still there, but I still don't like it.

[ValueMaven]

As a shareholder I ENJOY waiting on that second line....

 

 

[bizaro86]

As a shareholder I ENJOY waiting on that second line....

 

That was a factor in me buying shares. It improves my attitude about the money/time spent there.

 

I did add quite substantially (with options) last week.

[Gregmal]

As a shareholder I ENJOY waiting on that second line....

 

That was a factor in me buying shares. It improves my attitude about the money/time spent there.

 

I did add quite substantially (with options) last week.

 

Yea I added a bit after the earnings selloff as well. Thought about the options but ultimately given apprehensions about where we are with the overall market I figured slow and steady adds vs peddle to the metal. Shorted a few of the June $300 puts as well for ~$10. Still some reasonable juice on those in exchange for locking in some shares on a pullback. That would probably be my ideal way to play this. Just write puts 10-20% below the market and get your $20-30 per share a year if not exercised.

[bizaro86]

As a shareholder I ENJOY waiting on that second line....

 

That was a factor in me buying shares. It improves my attitude about the money/time spent there.

 

I did add quite substantially (with options) last week.

 

Yea I added a bit after the earnings selloff as well. Thought about the options but ultimately given apprehensions about where we are with the overall market I figured slow and steady adds vs peddle to the metal. Shorted a few of the June $300 puts as well for ~$10. Still some reasonable juice on those in exchange for locking in some shares on a pullback. That would probably be my ideal way to play this. Just write puts 10-20% below the market and get your $20-30 per share a year if not exercised.

 

I was a bit more aggressive than that. Bought the '23 calls. $220 strike for $100 (cheap leverage in a retirement account that can't use margin). I added a bit of '23 $400s at $16, which is admittedly a speculation.

[ValueMaven]

I know this is a pipe-dream and highly unlikely - but how nicely would COST fit inside of Berkshire's MSR unit??

[bizaro86]

I know this is a pipe-dream and highly unlikely - but how nicely would COST fit inside of Berkshire's MSR unit??

 

I think it would be awesome but pretty unlikely, for two reasons (outside of the price which is pretty high).

 

1) Costco doesn't spend its cash flow already. Recent big BRK acquisitions seem to be focused on things that have significant capital deployment opportunities, either through Capex or tuck-in acquisitions. PCP,  the utilities, even BNSF fit this pattern.

 

2) That would be a pretty big implicit admission that Munger was right and he was wrong. Not that he couldn't do that, but somehow I doubt he'll make what would almost certainly be his last big acquisition something where that would be the headline.

[cubsfan]

^ Likely the real reason is that Buffett does not do unfriendly takeovers - and COST certainly doesn't need Berkshire to grow.

[bizaro86]

^ Likely the real reason is that Buffett does not do unfriendly takeovers - and COST certainly doesn't need Berkshire to grow.

 

Another good point. Although I could see Costco being ok with Berkshire permanent home and emphasis on culture/philosophy

[cubsfan]

^ As a shareholder of both - I'd love to see it happen. Just don't think it can happen until COST falters in a big way.

[bizaro86]

^ As a shareholder of both - I'd love to see it happen. Just don't think it can happen until COST falters in a big way.

 

Agreed. Costco shareholders would only sell for a premium to the already high valuation, and I don't think BRK would be willing to pay up to the extent necessary. If there is a big sell-off/downdraft maybe.

[Gregmal]

Looks like another instance of "here's your dip"/"oh noes still too expensive"........has played out here. Pattern recognition and behavioral analysis is a nice ace up the sleeve of an astute investor. Others will continue to make the same predictable mistakes over and over again.

[ValueMaven]

Bought fairly aggressively although not enough on earnings day...street took it down to $309 or so - about $80 off its high just a few months ago!  Will likely hold this for a long period of time. 

[Spekulatius]

Looks like another instance of "here's your dip"/"oh noes still too expensive"........has played out here. Pattern recognition and behavioral analysis is a nice ace up the sleeve of an astute investor. Others will continue to make the same predictable mistakes over and over again.

 

Many here in fact did buy this dip, including me.

[fareastwarriors]

Looks like another instance of "here's your dip"/"oh noes still too expensive"........has played out here. Pattern recognition and behavioral analysis is a nice ace up the sleeve of an astute investor. Others will continue to make the same predictable mistakes over and over again.

 

Many here in fact did buy this dip, including me.

 

For me, I need to have skin in the game in order to pay attention. I keep missing out. smh. I really need to start buying even if I don't love the "valuation."

[Gregmal]

My post was a little sarcastic but just trying to highlight a general point that I think can be learned from. Everyone has a process, when the process is wrong, you can either move onto other things or try to figure out why.

 

Statement: Costco has been a great investment

 

Statement: I look to buy great investments

 

Question: Why haven't I bought Costco

 

 

So you can tackle this a lot of ways but ultimately, the correct answer is that your process has been wrong. Otherwise, if your objective is to buy great investments, and COST has been a great investment...something doesnt add up.

 

EVERY investment has short, medium, and long term drivers. A matrix in a way. Your job, if you are a curious investor whose objective is to make great investments and ultimately make money, is to see the matrix.

 

So with COST...we come back to process.

 

Your process was X/Y/Z....and this process leads to not buying Costco. Once you hone in on which input led to the faulty output...then you can correct it and get a better result next time. Here, obviously too many folks just blindly focus on valuation...and 15 consecutive times make the same mistake....I mean at that point just ignore Costco because you dont get it and never will. Or...you can see, uhm if I eliminate this one focus point, otherwise its an easy(almost no brainer) investment...and act accordingly. I mean there's a reason a 20 year NNN lease with an A rated credit tenant in a top MSA trades at a different cap rate than a month to month lease with a 2 man small business....duh. So with Costco, thats really where you want to focus and the quality and durability of the income being produced is superior to even a Target or further down the totem pole a Big Lots or Best Buy. So of course if you sit there and analyze it hoping for it to cross paths with those types of things you're never going to get things right....easy to see when you look at it like that, right?

 

Ultimately I think much of the faulty investment process can be traced back to ill advised adherence to value investing rhetoric. For the most part, that stuff is nice ideological framework...but lets face it...much of the stuff is bullshit and even when Buffett and Graham did their thing they were applying it to bad business, cigar butts, and companies in distress. The easiest thing is simply to remember that everything has a matrix. There's often many common elements of overlap with all investments. But each one is unique and possesses different drivers. Could be an upcoming catalyst, could be share count/float, could be tax changes, could be a product launch....whatever...your job as an investor is to see the matrix. Not just plug in crap from the income statement or balance sheet and then project what you think is an appropriate PE...With Costco, if you're looking at valuation, or looking at hot dogs....well....youre just wrong and until you start focusing on the things that are important to the investment you're going to continue to be wrong.

 

 

[dwy000]

I'm not sure that failing to buy Costco means your process is wrong.  You can be hugely successful without ever having looked at Costco.

 

Conversely, you can answer the same questions you asked by showing that GME or Tesla has been a great investment and if you didnt buy it your process it wrong. Whatever process works for you, do it!

[bizaro86]

I have a heuristic for this. If a truly great business declines a bunch and I think its almost starting to get cheap, I buy a bunch. Success has been high.

 

I did buy a bunch of LEAPs on March 8th (which I'm pretty sure I mentioned in this thread). I sold one of the out-of-the-money contracts this week and used the profit to cover my new Traeger grill (which I bought at Costco). It seemed poetic and I wanted the grill anyway so I did it. Keeping the rest of my contracts for now.

 

I will probably eventually sell the options and roll the profits into shares, to go with my pre-existing "never sell" position.

[Gregmal]

If you are consistently looking at COST and cant figure out how its a good investment, then your process in terms of how you are going about analyzing COST is wrong. Everyone has their own process, and yes you can be hugely successful investing in other things that are more down your alley; of course.

 

But often investors make the same mistakes over and over again...Buffetts talked about it with some tech names and in general how it took him a while to rearrange his process to focus on quality at a reasonable price. Some people are just static and cant adapt. Some just stick to their circle of competence. End of the day, do what works. For me, expanding my universe to try to understand or get comfortable with as much as possible is generally the goal. The more things I can navigate to make money the better. I'd hate to be the guy who's circle of competence area spends years(or longer) in a bear market while theres other stuff going on.

[ANP301191]

https://investor.costco.com/news-releases/news-release-details/costco-wholesale-corporation-reports-second-quarter-and-year-21

E-Commerce sales y-on-y growth is pretty amazing in spite of Covid-19 forcing people to purchase online. Anyone use Costco's online store? How does it compare to a Walmart or someone elses?

[compoundinglife]

1 hour ago, ANP301191 said:

https://investor.costco.com/news-releases/news-release-details/costco-wholesale-corporation-reports-second-quarter-and-year-21

E-Commerce sales y-on-y growth is pretty amazing in spite of Covid-19 forcing people to purchase online. Anyone use Costco's online store? How does it compare to a Walmart or someone elses?

The online store is very similar to the brick and mortar. It is not a full blown retail store. They have a limited catalog inventory, certain things can only be delivered to certain locations but prices are pretty good. I only go to the online Costco store for big ticket items where I want the Costco return policy. Or items I already know they stock. I don't go there to explore or "shop". Pre covid I bought tons of stuff from Amazon etc.. but nothing online from Costco. Since the Pandemic started I have bought the following from costco.com:

New washer and dryer

Luxury vinyl tile

Outdoor Gazebo

Garage shelving 

If I am spending over 1K on something I will usually try Costco first because I know they will take it back if I don't like it for whatever reason.

 

[Broeb22]

On 3/26/2021 at 8:59 PM, Gregmal said:

If you are consistently looking at COST and cant figure out how its a good investment, then your process in terms of how you are going about analyzing COST is wrong. Everyone has their own process, and yes you can be hugely successful investing in other things that are more down your alley; of course.

 

But often investors make the same mistakes over and over again...Buffetts talked about it with some tech names and in general how it took him a while to rearrange his process to focus on quality at a reasonable price. Some people are just static and cant adapt. Some just stick to their circle of competence. End of the day, do what works. For me, expanding my universe to try to understand or get comfortable with as much as possible is generally the goal. The more things I can navigate to make money the better. I'd hate to be the guy who's circle of competence area spends years(or longer) in a bear market while theres other stuff going on.

To echo Gregmal's sentiment, I worked for a guy who consistently ran with 40% cash and had mediocre returns. He's the guy who bought MSFT at a single digit PE multiple around 2011-2013 then sold a couple years later when it went up 75% in a couple years. He got his 25% IRR and missed out on a huge run in the stock from $50 to $250.  and couldn't see that Nadella was a huge upgrade over Ballmer. Didn't wait around to find out how the new CEO would do things, and never revisited even after it ran up to maybe buy into what was now a really attractive GARP investment. 

He's also the guy that bought EBAY before it spun out PYPL and sold PYPL after one of his more boisterous clients showed him a short report discussing how much of PYPL's business that EBAY represented and at favorable take rates. Sold that at around $40, when PYPL is now a $265 stock (and maybe a bit overvalued).

I've made most of my (limited) money in GARP-y type stuff that I was able to buy at 20-25x forward earnings/cash flows and then watch it grow earnings at 15-20% per year. The only problem I found was there were companies I really liked that I just waited and waited and waited for them to get to that magical 20-25x earnings level that seemed to work, but they never got there. Some of these companies were always on the high side of 25x. Buying at 20-25x had worked out well for me on these companies that I thought could grow at 15-20% per year, so expanding what I'd pay would mean I might accept 12-15% returns, but it was better than sitting on cash like my boss taught me to do. 

P.S. my former boss' "best idea" is now Equity Commonwealth, a pile of cash run by a really smart real estate guy in Zell. Certainly not a bad pick, but the only idea you can find nowadays? C'mon man.