There's a place I can't stand to inhabit for more than about 90 seconds. Ironically, it's also my father-in-law's absolute favorite place on Earth. Literally everything he buys, he purchases here; jeans, flat screen TVs, digital cameras, thanksgiving dinners, beer, tires for his truck, pickles, DVDs, gasoline, personal computers…everything. This place is a warehouse (literally) where products are placed haphazardly among its towering storage shelves. In any given aisle you may find a pallet of camping tents stored next to 5-gallon buckets of mayonnaise next to a selection of caskets. The lack of coherent organization grates on my nerves, but the main reason for my anxiety while in the building is the horde of bargain hunters.
My wife and I invite her dad to come spend extended periods of time with us and it's inevitable that I'm going to have to endure many trips to this wretched store, so I tried to think of a way to not only make the trips bearable for me, but maybe enjoy or actually get excited to be there. Perhaps if I owned a portion of this company, I wouldn't see the multitudes of slow-moving shoppers as obstacles, rather I may welcome them as profits.
My stock pick for this week is Costco (COST) at roughly $77.25.
Due to the fact that the products at Costco are sold at extremely low prices, they have had to come up with lots of ways to cut operating costs. American Express is the only accepted credit card (in the United States, Canada, and Japan) because they charge Costco very low interchange fees. Costco does not carry multiple brands or varieties where the item is essentially the same except when it has a house brand to sell, typically under the Kirkland Signature (Costco's store brand) label. If Costco management feels the wholesale price of a product is too high, they will refuse to stock the product. Costco also saves money by not stocking extra bags or packing materials; to carry out their goods, customers must bring their own bags or use the merchandise shipping boxes from the company's outside vendors. Lighting costs are reduced on sunny days, as most Costco locations have several skylights. During the day, electronic light meters measure how much light is coming in the skylights and turn off an appropriate percentage of the interior lights. The majority of Costco locations are not unionized, yet Costco has a "Costco Employee Agreement" which sets forth such things as benefits, compensations, wages, disciplinary procedures, paid holidays, bonuses, and seniority. Non-supervisory hourly wages ranged from $11.00 to $21.00 in the United States, and 85% of Costco's workers in the United States have health insurance.
This no-frills, low-cost, bulk-shopping model has done well in the US and Costco has begun expanding their stores internationally. Despite the fact that I feel a bit claustrophobic shopping there, Costco’s core values should lead them to succeed wherever they may grow:
Obey the law
Take care of your customers
Take care of your people
Respect your suppliers
My father-in-law is a Costco gold star member. He has a Costco American Express credit card that he uses exclusively (it annually pays 2% cash back up to $500). Their return policy is excellent: they guarantee almost all of their products with a full refund within a reasonable amount of time. They even go so far as to negotiate with manufacturers to extend the manufacturer’s warranty to two years for new TVs and computers. Because of their return policy and extended warranties, my father-in-law buys all home electronics that he purchases at Costco. I'm not sure if he is a typical Costco consumer, but he certainly tries to take advantage of everything they have to offer which has made him extremely loyal to the store. And measuring my frustration navigating through the bargain-hunting hordes, he's not the only one.
I should disclose that I plan to buy Costco if wall street still exists after hurricane Irene. [more]
Have you ever wondered what teddy bears eat? No? Me neither. Try to imagine, if you will, a group of teddy bears living in the forest. They happen upon a great bounty of food and their entire village is about to enjoy a massive feast. But just before it's time to eat, something happens and dinner is called off. No food for anyone. The little teddies would be understandably upset. Maybe they were about to fatten up before hibernation and the missed meal made them a bit irritated. What if the thought of their baby teddy bear cubs starving drove the village into an enraged frenzy? Now imagine this throng of seething, ravenous stuffed animals becoming violent and doing something completely irrational; like attacking a military outpost or worse: selling off tons of shares of a perfectly good company.
I'm not exactly sure how it came about (it's possible that it wasn't teddy bears), but shares of Flower Foods dropped 10% in one day. Their earnings report came out yesterday and although it could have been better, it wasn't rabid-teddy-bear-bad. In this quarter they announced a 3-for-2 stock split and increased their annual dividend rate by 12% per share. Flowers Foods acquired Tasty Baking Company (along with Tastykake's debt) and they've had to layoff some employees due to redundant positions after the merger. Earnings per share were less than what analysts predicted due to "higher input costs across all segments," (ingredients, packaging, natural gas).
Many shareholders couldn't stand the heat so they fled the kitchen. In my opinion, the sell off was a bit overboard. Flowers' management is excellent and have shown that they can manage risks, reduce costs and make intelligent acquisitions. The company is a slow and steady grower that pays a dependable dividend. My stock pick for this week is Flower Foods at roughly $19.35 / share. [more]
Aflac's stock has had a rough year and it's currently trading at a 52-week low. The trajectory of Aflac's stock price is that of a company who may have disrespected their customers, disappointed their shareholders or got caught doing something illegal or financially dumb – but none of these are the case. They have paid the claims of their policyholders affected by the disasters in Japan. They continue to show their appreciation to investors in the form of a 3% dividend yield while maintaining very sustainable payout ratio of around 30%. They paid a premium to sell their securities in risky European banks which tells me that they're looking out for their investors. And despite their losses from the derisking, a rough economy and high unemployment, Aflac's earnings are still favorable.
Although the stock price may continue to drop for the short term, I feel the fundamentals of Aflac are strong and I can no longer resist the urge to buy at the current price. My stock pick for this week is Aflac at roughly $36 / share. [more]
For my first "stock of the week," I tried to consider which stocks would have relatively low volatility during this tumultuous economic climate. My goal was to find a company that provides a service or product that people really need or, better yet, has their customers committed into paying a monthly bill and they do so happily. Preferably, this company provides good reliable service, pays a handsome dividend and has a positive, long-term economic outlook. So after work, I scurried through the heat wave to my over-air conditioned home to try to come up with a company that fit as many of these criteria as possible. Finally it hit me: from the eccentric astrodroid to the lowly moisture farmer to the ruthless crime lord, everyone needs it. No, I'm not referring to some mystical energy field that controls our destiny, I'm talk about power. Specifically I'm talking about Dominion Resources.
This Richmond, Virginia-based company has been around for about as long as Yoda has been training Jedi and they've been in the electric business for over 100 years. They currently serve more than 5 million retail energy customers and they have rewarded their investors with 334 consecutive dividend payments. The current majority of their electric production comes from coal (46%) and nuclear (41%), but they have begun construction on a natural gas processing plant in West Virginia and they continue to grow their renewable energy sources from wind, hydro and biomass.
As a Dominion customer, I have experienced very good service from them getting a person on the phone, getting someone to come out to my house, setting up new service and they are pretty good servicing outages (as compared with the utility across the Potomac, PEPCO). There are other electric utilities that could be a wonderful investment opportunity (Southern Company, the American Electric Power Company and the aforementioned Pepco Holdings Inc.), but I have this warm feeling that every time I pay my electric bill, some miniscule portion of my payment will be returned to me in the form of a dividend. [more]
I am an investing novice and what I've found here at The Motley Fool has really made me excited about investing. My idea for starting a blog is that this will be a good way to document my growth as an investor while creating a vehicle for getting veteran advice and criticism regarding my thoughts. I figure the worst-case scenario (if I manage to keep up and write something every week) is no one will comment or even notice my blog. In that case I'll have nothing less than an investment diary documenting my thoughts of why I had purchased each stock when I did. The best case scenario would be for this blog to initiate a rich discussion about the stocks I'm most interested in. [more]