Costco Stock: Long Road To $300

I’ll cut to the chase: It should take ten to fifteen years for Costco stock (CSCO) to reach an earnings level that would justify a price of $300 per share, roughly double the $149 price of Costco stock that existed as of Friday’s close.

Considering that Costco stock only offers a starting dividend yield of around 1%, I assume that most people own Costco stock because they want it to give them strong capital appreciation.

That makes me pose the question: What business results would be necessary for this stock to legitimately double in value?

Because Costco has such strong relations between management and labor, has an unusually strong balance sheet of $4 billion in cash and only $5 billion in debt, earns “free” income through its membership renewals, and has a demonstrated history of 8-10% annual earnings growth, I am willing to accept the premise that Costco stock will … Read the rest of this article!

American Express Stock: Value Investing Wins Again

Between American Express, Visa, and Mastercard, there is no doubt that American Express has the worst growth characteristics of the three. Visa has been busy penetrating the European markets to keep its trajectory of 13% annual growth in line, and Mastercard stays a close second with its trajectory of 10-12% earnings growth. Both of these credit-oriented corporations are likely to have long-term earnings growth that is doubled what you will see from the S&P 500.

And then there is American Express. For the next five years, it is only expected to grow earnings in the 5-7% range. Its growth is not nearly as attractive as Visa and Mastercard.

And yet, it has been the focus of my attention this year because of its dirt-cheap valuation. On January 22nd, I wrote “Classic Value Investing Right Now: American Express Stock At $55.” The reason why it caught my attention is … Read the rest of this article!

Index Funds and ExxonMobil Stock

I have previously shared with you my view that the increasing prevalence of index funds creates some market distortions because investors perpetually buy stocks based on market-cap weights rather than fundamentals. When a business owner sells his $10 million business and puts $6 million into the S&P 500 Index, he is placing a buy order for $180,000 worth of ExxonMobil stock automatically. It’s the nature of the programming behind the index. Exxon is the second-largest business domiciled in the United States based on market cap, and all buy orders reflect the fact that Exxon Mobil’s market cap of $300+ billion is about 3% of the $15+ trillion stock market index.

Whether oil is $50 or $100, or the oil giant’s profits are high or low, you are purchasing the stock if you hold investments keyed to an index. This by definition corrupts the principle of fundamental analysis because people aren’t … Read the rest of this article!

A Microcosm Of The Stock Market Right Now

Just last night, I was reading through the annual report at Waste Management (WM). It is the definition of a stable cash generator. You can lump it alongside utilities and consumer non-cyclicals as “best type of stock to hold during a recession.” I personally like it because trash is a self-evidently unsexy business, and the executive culture at such businesses tends to be light on stock bonuses, general dilution, overhyped acquisitions, and other largesse that tends to attach to billion-dollar enterprises.

Over 25+ year periods of time, you tend to get 3.5% revenue growth and 7.5% earnings growth with a business like this. Throw in a 2.5% dividend, and your results will tend to mirror the S&P 500 over long periods of time.

If you are investing according to Warren Buffett’s “Twenty Punchcards” or trying to put together a career where you beat the S&P 500 by four points annually, … Read the rest of this article!

Amazon’s $40 Stock Price Fall Justified

Amazon (AMZN) is one of the top five companies to come into existence during my lifetime. When we look back on the top storylines of the 1990s through 2010s, the growth of Amazon and its role in making e-commerce socially acceptable will be one of the storylines when we review the tale of our civilization decades from now.

But for the past few years, the problem has always been that Amazon’s valuation was so completely obscene that even highly optimistic expectations could still eventually translate into mediocre returns. Because stocks have valuations, you find yourself getting interested in things like Viacom, BP, and IBM even though you know other publicly traded corporations have higher growth rates.

My theory relating to Amazon’s valuation has been pretty simple. Over very long periods of time, all large-cap non-cylical stocks tend to converge towards a P/E ratio of about 20. Maybe some mega-caps are … Read the rest of this article!