Sunday, September 16, 2007

Ah Yes, The Old Where Is The Next

In my 28 years in the investment industry, whether advising professional portfolio managers , or serving as a financial coach to individual investors, the question always seems to come up-- where are and who are the next Microsoft's, Wal Mart's or General Electrics. Who has that better mousetrap that will captivate investors and take them on the 10-15 year ride?

Well, I think I have identified 2 such companies and they are outright buys. The first one I have written about in an earlier article titled "Bigger Than McDonald's? Yes, Bigger than McDonald's", and that company is Starbucks, ticker symbol SBUX. Since I wrote that article about a month ago, the stock has moved up about $4 per share and Starbucks has communicated their ambitious plans to have a worldwide store base of 40,000 units, up from earlier plans of 30,000-35,000 units. I could write a book on the Starbucks mystique and their relentless pursuit of perfection.

But, let's get to the second company. That company is Costco Wholesale Corp., ticker symbol is COST. They just reported their fiscal 4th quarter results ending August 31, 2006, and the quarter was $.75 per share versus expectations of $.72 per share. The 2006 fiscal year ended with earnings per share (EPS) of $2.30 with revenues at $58.9 billion. The expectations for August 31, 2007 are for revenues of $66 billion and EPS of $2.67-2.70, and fiscal year 2008, look for EPS at $3.10 and revenues of $74-75 billion. The market capitalization of Costco is just under $25 billion. Subscribers to www.georgesyared.com were advised to buy the stock earlier this week before the earnings were released. The stock has moved up $4 this week.

Great, but where do we go from here? COST has the opportunity to be one of the two great companies that re-defines the retail space (along with Starbucks) over the next decade. If you have not been to a Costco store, go to one. I am not your usual type shopper, i am- a -get- me- in and get- me -out type shopper, except when it comes to Costco. My wife thinks I am nuts, but I love that place, have bought lots of unnecessary things and cannot wait to go back. I have happily paid my $100 membership fee for 3 consecutive years now. The experience is very worthwhile.

COST has 480 no frills warehouses, mostly in the United States, where the selection and quality are superb. Whether its fresh produce, a huge choice of fresh meat and fish, furniture, books, electronics, groceries, clothes (nice clothes too) or vitamins, the prices are low and the quality is the best. Costco consistently beats Sam;s Club of Wal Mart month in and month out in same store sales comparisons.

I actually did a "man on the street" interview at Costco earlier this week, unscientific, but the answers were consistent: people enjoy shopping at Costco, while Sam's Club customers (all 8 that I spoke too!!) said they were there for the quick in and out. People linger at a Costco, and because of the free samples available everywhere you turn and the wide selections. You buy tons of great and unique foods that you did not plan on. It's awesome and some would say, even addicting!!

From the investment perspective, this $24.9 billion market capitalization company could become a $100-150 billion market cap company. They will add another 80+ warehouses in 2007-2008, and a total of 200-250 over the next 5 years. The average Costco does $130 million of volume, compared to Sam's Club average of $75 million. Costco has a loyal group of employees because they pay the best and offer proper benefits. Loyal employees is one reason for the incredible service-levels at Costco.

Costco has their own signature private label brand of Kirkland. Kirkland maintains very high standards whether it be dog food all the way to vitamins. Costco is offering deals to its members on auto insurance and actual specials on automobiles. The home furnishing division offers high quality blinds, curtains and furniture. Costco does not cut corners on quality. They are lean and very efficient, and their employees are extremely motivated and helpful.

Well, investors...you asked about the next.... Starbucks and Costco...

For more information, please go to www.stoplosingmoneytoday.com

Georges Yared has been in the investment industry for 28 years. The first 15 advising individual investors with Dean Witter Reynolds (now, Morgan Stanley), and the last 15 years with two research boutique firms, advising professional money managers and growth companies. Georges was in charge of international sales at Wessels, Arnold and Henderson from 1992-2002, and from 2002-2006, with researchand investment banking boutique ThinkEquity Partners. Georges has advised over 5,000 individual investors, over 100 professional portfolio managers, 200 publicly traded growth company managements, and has worked with over 150 world class research analaysts. His passion is financial coaching and intelligent, informed growth investing. Georges lives with his wife Cindy and their children in Minneapolis, Minnesota