Thursday, May 26, 2016

Costco - Mr. Market Miscalculates

The book title "Mr. Market Miscalculates," written by James Grant came to mind as I witnessed the strong positive market reaction to Costco's recent earnings release.(1) This came after the pros sold off Costco in earnest during recent weeks in front of the earnings release due to challenges reported by several other well known traditional land based retailers and the assumption that Costco was suffering a similar fate. The market misjudged Costco as reported results were better than expected. Costco indicated that customer behavior was unchanged.

My local store visits prior to the earnings release revealed no significant changes in visible metrics like store traffic and parking lot occupancy. Gasoline lines were also present as they have been for months. In short, I observed no change in a business with ongoing robust traffic and significant customer loyalty. Customer loyalty is apparent as evidenced by the consistent significant check out lines in my local stores and the published 90% membership renewal rate. As a customer you clearly understand why you renew each year which may or may not be the case for the professional money management crowd. If you own a piece of this business via the equity market it pays to know something about its competitive position, in my humble opinion. Being a customer is helpful on this front. If you are a friend of mine you already know that I am a customer and exhibit an obnoxious pride in ownership as I acquired my equity stake at just under $30 per share more than a decade ago. You also know that I have been a buyer in this stock for years. My latest buy before the earnings release was in the low $140's which meant that the market was pricing the equity near estimates of the intrinsic value of the company based on forward assumptions I was willing to bet on. Costco remains my biggest position.

In September 2015 I disclosed many of my holdings. I continue to hold onto most of the names mentioned although the position sizes have changed. Recent buys include Costco (discussed here) as well as Disney and Apple acquired post the most recent company earnings releases that disappointed Wall Street.

(1) James Grant, Mr. Market Miscalculates, November 2008