Costco Investors: Don’t Overpay, Especially For Retail Stocks

Costco Wholesale (COST) is an excellent corporation. It has an extraordinary Board of Directors that includes Berkshire Hathaway Vice Chairman Charlie Munger, has grown profits by 11% annually for a decade, has 195,000 workers that generally experience better working conditions than many of their similarly situated peers, and has an excellent balance sheet that features $200 million more cash on hand than total debt obligations required (which is extraordinary for a large retail corporation). As best I can tell, it meets every characteristic of Benjamin Graham’s “Defensive Investor” checklist.

Except one. Valuation.

It is no secret how well run Costco is, and the current $151 per share price tag reflects this information. It makes about $5.35 per share in profits. That’s a valuation of 28.2x earnings. Looking out over the medium term, this current valuation mixed with expected future returns is exactly the kind of thing that will give you … Read the rest of this article!

What Does 3G Capital Teach Us About Reality?

Last March, Charlie Munger was asked about Berkshire Hathaway’s partnership with 3G Capital that has resulted in an unspecified number (estimated to be in the 4,000-8,000 range) of jobs that have been terminated as a result of 3G operators taking the helm of the combinated Kraft and Heinz. Munger responded: “What’s interesting about 3G is that they’re teaching us something about reality.” Munger didn’t offer a detailed elaboration. This begs the obvious follow-up: What’s the lesson on reality we are supposed to take from this?

In my view, there are five things–two good, three bad–that 3G is teaching us about the 21st century large-cap food sector.

First, the good:

The rise of 3G lets shareholders reap the benefits of wealth creation that previously stood unexploited. Usually, M&A activity, activist investing, and shareholder agitation are most prominent in industries that are subject to market demand changes or regulatory changes. Look at … Read the rest of this article!