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Tight food margins and high unemployment...so why do I like Costco and Paychex?

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February 02, 2011 – Comments (15) | RELATED TICKERS: COST , PAYX

I have not done my DD yet, because I would like to know if my theories make any sense before I spend hours on these companies, so any input is appreciated.

 

Paychex: unemployment high, fed funds rate low.  Those are two bad things for Paychex.  Yet, their earnings are growing and they have a healthy dividend which is better than the SPY's.  If they can have a better than average dividend combined with earnings growth in this bad environment, then I think this is a good stock to buy now and sell when unemployment is low and fed funds rate is high.  They are also best of breed...by far highest margins in their industry. What do you think?

 

Costco: Inflation (specifically food) and the growing population should hurt retail food sellers.  This leads me to believe that Costco will crush its competitors.  Why?   When food prices start  to rise, people will want to go to the cheaper food places, so this puts Costco already at an advantage to whole foods, super fresh and the like.  But then why Costco? You need a membership to get to Costco.  This means 1) more brand loyalty 2) people will (this is from basic logic and some knowledge of psychology) think "well I already paid the membership, it would be a waste not to keep going" (I know what a sunk cost is but most people don't).  People are always going to need food so its not a good they can ditch.  And buying in bulk might make sense if you expect prices to keep rising.  Employees of Costco love working there, and the CEO takes a paycheck of $300,000 a year which is very low for a CEO of a big company. If the industry gets chaotic, the employees will not freak out as much as in other retailers because they are loyal workers.  Also, the CEO is not lavish so it seems that he will do what he can to remain competitive, and not be focused on himself, so he will cut the costs he must.  Plus, Costco is seen as socially responsible, and people are liking that more and more.  I realize you don't want to own a stock like Costco in a bull market, but this could be the exception.

 

Are either one worth a further look, or is my initial analysis wrong in some way?

15 Comments – Post Your Own

#1) On February 02, 2011 at 10:51 PM, HarryCarysGhost (99.70) wrote:

Dude, you pretty much answered your own questions-

Paychex: unemployment high, fed funds rate low.  Those are two bad things for Paychex.

And-

 Also, the CEO is not lavish so it seems that he will do what he can to remain competitive, and not be focused on himself, so he will cut the costs he must.  Plus, Costco is seen as socially responsible, and people are liking that more and more.

When I read something like that it makes me want to check out Costco more. (Disclosure- never looked at these stocks until I read this blog)

Go Steelers!

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#2) On February 02, 2011 at 11:18 PM, HarryCarysGhost (99.70) wrote:

I'm sorry but I can't resist repeating a joke I just heard on Tosh 3.0?

The Jets are much like the Yankees.

In that everyone hates them.

The difference is lack of great players.

No tradition of winning.

And the Jets have a couch who j@rks off every time a player gets his ankle taped... : ) 

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#3) On February 03, 2011 at 12:40 AM, Valyooo (99.36) wrote:

Whatever, I am rooting for the Packers so SUCK ITTT

Haha, but did you really call it 3.0?  Because for somereason I said that the other night even though I know it is Tosh.0 because I was very...."not low"...good stuff

Costco's internal structure is legit.  People love it, employees love it, great deals.

I know I said its bad economy for Paychex, but isnt the best time to buy something when its at its low point and yet the company is not failing?

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#4) On February 03, 2011 at 1:00 AM, ChrisGraley (29.69) wrote:

Costco has good management, so they will succeed.

I'll never root for a rapist or a dog killer, (I'd root for the coach that likes feet before that)

The Packers have a LB that's a heat seeking missle and I hope that he knocks the rapist out of the game early.

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#5) On February 03, 2011 at 3:08 AM, Valyooo (99.36) wrote:

Chris, what else did you use to make the conclusion about their management...not questioning what you know, i just want to know in general how people can know when a company has good management

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#6) On February 03, 2011 at 8:11 AM, ChrisGraley (29.69) wrote:

Well you hit the 2 biggest things already. They treat their employees well and the CEO doesn't overpay himself.

Also they manage to compete with Sam's Club and Walmart by offering higher quality products at decent prices.

It's hard to knock a company that's making money and loved by both customers and employees alike.

 

 

 

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#7) On February 03, 2011 at 8:59 AM, Melaschasm (57.38) wrote:

Costco has good long term growth opportunities both in the USA and asia. 

Even if the profits per store remain flat, Costco should be able to grow profits by increasing the number of stores. 

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#8) On February 03, 2011 at 10:06 AM, chk999 (99.97) wrote:

Costco is a fantastic company for a lot of reasons. The stock has never seemed cheap to me, so I have never bought any. But sooner or later there is going to be a big pullback and I am going to load up.

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#9) On February 03, 2011 at 5:39 PM, Valyooo (99.36) wrote:

Chk999,

I have two questions regarding that concept.  1) If a stock historically does not trade cheap, then shouldn't you just buy it when it is relatively cheap compared to its own pricing history?

2) I sometimes quesiton the margin of safety concept.if a stock is worth $5 and trades at a P/E of 20 and never has a pullback but the earnings keep increasing, and the stock climbs to $25, having a p/e of 20 the whole time, and then it pulls back to $18.75 giving it a p/e of 15, now it is "cheaper", but you would have made more money buying when it was "expensive". So does it make sense to start a position whenevr you want and then just load up when it gets cheap?

Also, metrics should I be using to evaluate 1) the company 2) when its price is cheap.  I dont know much about the industry.

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#10) On February 03, 2011 at 11:34 PM, HarryCarysGhost (99.70) wrote:

I know I said its bad economy for Paychex, but isnt the best time to buy something when its at its low point and yet the company is not failing?

Ah! the contrarion view something very near and dear to my heart.

How do you figure Payx is at it's low point, pretty close to the 52 week high?

Also I think that theory only works when the market overall is oversold. Seriously how much upside are you expecting from these levels. Seems like Payx trades below the S@P most of the time, so why would'nt it go down if we had a correction.

Not that I'm predicting, I've thought that Mr Market was overbought since we first hit Dow 11,000 in Jan 2010( took my profits on stocks that I did'nt veiw as long term and never looked back). So take this with a grain of salt.

So unless you saw a special situation that told you the shares were going up I don't see a reason to invest in Payx. (I do like the yield)

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#11) On February 03, 2011 at 11:57 PM, Valyooo (99.36) wrote:

Valid points, I will ignore PAYX and focus on PM, COST, and IMAX.  I am not really sure how to do real thorough analysis on "investments", I am more of a swing trader that wants to become an investor.

Anyway, what do you say to my post #9?  This is something I have been struggling with recently.  I always thought "buy cheap companies" but recently I have realized, often times a company is cheap because it sucks.  And good companies often keep moving up without ever being "cheap".  So I don't know if building a position and DCA is good enough or if I do really have to wait for a big pullback.

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#12) On February 04, 2011 at 1:00 AM, HarryCarysGhost (99.70) wrote:

I have two questions regarding that concept.  1) If a stock historically does not trade cheap, then shouldn't you just buy it when it is relatively cheap compared to its own pricing history?

My answer to that would be- If you find a company you really like, solid management, growing profits, increasing divs. It's a prime candidate for a 401K or an IRA roth. Just keep chipping in no matter what Mr. Market does.

2) I sometimes quesiton the margin of safety concept.if a stock is worth $5 and trades at a P/E of 20 and never has a pullback but the earnings keep increasing, and the stock climbs to $25, having a p/e of 20 the whole time, and then it pulls back to $18.75 giving it a p/e of 15, now it is "cheaper", but you would have made more money buying when it was "expensive". So does it make sense to start a position whenevr you want and then just load up when it gets cheap?

Also, metrics should I be using to evaluate 1) the company 2) when its price is cheap.  I dont know much about the industry.

Dude, Ya lost me. (1) it's late (2) I try to keep it simple.

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#13) On February 04, 2011 at 12:54 PM, Valyooo (99.36) wrote:

for the 1) and 2) i meant, what metrics do I use to evaluate a company liek COST? price to sales, ROE, ROA, or what?

and for the rest of it, what I am saying is similiar to this....if a company starts at $3 and climbs to $6 in a month, people say its too expensive, it went too far too fast.  then it climbs to $9 and people say its reeeeeally expensive. then it corrects 33% to $6, and people say "its dirt cheap, look how big its down", meanwhile the last time it was at $6 it was "Expensive"

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#14) On February 04, 2011 at 10:51 PM, HarryCarysGhost (99.70) wrote:

Ok got it.

Hey Valyooo you were nominated for an award-

http://caps.fool.com/Blogs/what-the-hell-is-bofa/524471

(See comment #13)

Glad I was able to participate in this prestegious honor.

Altough the year is young so I'm sure if I set my mind on it, I could top that : )

 

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#15) On February 05, 2011 at 3:38 AM, Valyooo (99.36) wrote:

You already did that by rooting for the bears ;)

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