Costco Is The End All Be All Of Value Investors and Growth Investors

By Sikander Iqbal, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=82970691

Strategy

I consider Costco to be a value → growth position. It’s a rare security where the cash flow yield indicates a strong value play while the growth in membership (think of this like tech/software model) continues to bolster despite the pandemic/supply shortage/labor issues.

Portfolio Management: Risk Mitigation at 20% of Portfolio. Never bet your life on a stock, but “two-tenths”, now we’re talking.

ATH (All Time Highs): No doubt security is at all time highs but so is membership growth and leadership is expecting to raise these prices to correspond to inflation. Guess what, people will pay it.

Over-valuation: Absolute concern, maybe even nose-bleed but…sustained EBIT (Earnings Before Interest Taxes —in relation to profit) growth of ~10ish % is really unheard of in the equity market. (aka: they continue to grow their profits despite current market conditions).

Business Analyst Perspective from an MBA

Strong membership retention drives majority (if not all) of revenue. Excellence in customer service along with purchasing power from suppliers to leverage wholesale pricing → Phenomenal business model. Despite taking losses (or a better way of saying this is staying competitive) on certain value-propositions (consider the relatively low margins on roughly half of the product selection along with undercutting competition in avenues like gas), the company continues to bolster a stable retained growth. This is the definition of stable business model.

Finance Analyst Perspective from an MBA (Corporate Finance)

We’re looking at ~40ish P/E (price to earnings) which translate to ~20ish EV/EBITDA (Enterprise Value/Earnings Before Interest Taxes Depreciation Amortization). What does this mean? Let’s break it down.

P/E = Price to Earnings → The price you pay relative to earnings. We’re paying 40ish times more in stock price compared to company’s earnings.

EV/EBITDA

EV = Market Capitalization (or total value of the company).

EBITDA = Basically means actual profits after you take into account, costs so it can be referred to as “pure profit”

You simply divide the value of the company (EV) by the pure profit (EBITDA) and you get a multiple that relates to how expensive a company is based on its growth and valuation.

Why do we care?

At it’s core, Costco is basically a strong dividend security with strong cash flow and relatively good margins (taking into account membership revenue). This means that we should, technically, valuate Costco as a “Value Play”. Therefore, 40ish P/E is outrageous for this type of play (value investors would prefer in the 20’s so think Apple or Microsoft in this avenue).

On the other hand, the growth in membership profit is surprisingly competitive even in this current market. Therefore, I almost want to treat Costco like a tech/software (think SasS — Software as a Service) type of company but their growth is not within the same realm. So that means that I would essentially ignore P/E and consider EV/EBITDA because it is a better interpretation of actual profits base on it’s valuation.

Bottomline → from a valuation perspective, Costco is expensive but they are growing and you can bet that your capital will be compounded regardless of the market conditions. For that reason, I am willing to pay this “nose-bleed” valuation because I believe that this security will continue to compound above standard S&P average of 12ish %. I’m projecting anywhere from 20–30%.

Best Value Investor Bull Analysis

https://www.youtube.com/channel/UCbta0n8i6Rljh0obO7HzG9A

Portfolio Recap

20% BlackRock → Strategy Here

20% Costco → Strategy Here

20% Builders FirstSource → Strategy Upcoming

15% UnitedHealth Group → Strategy Upcoming

15% Palo Alto Networks → Strategy Upcoming

5% Tuttle Capital Short Innovation ETF → Strategy Upcoming

5% ARK Innovation ETF → Strategy Upcoming

Big Picture

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DISCLAIMER

THIS CONTENT IS NOT FINANCIAL ADVICE! DO NOT COPY MY PORTFOLIO! DO NOT BUY MY STOCK PICKS! I AM A RANDOM PERSON ON THE INTERNET! I COULD LOSE ALL MY MONEY AND SO COULD YOU, SO DO YOUR OWN DUE DILIGENCE! YOU ARE RESPONSIBLE FOR YOUR OWN FINANCIAL DECISIONS SO DON’T BE AN IDIOT.

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Managing a Personal $100K Wannabe Hedge Fund Portfolio and I Have No Idea What I’m Doing.

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Analyst Peter

Analyst Peter

Managing a Personal $100K Wannabe Hedge Fund Portfolio and I Have No Idea What I’m Doing.

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