Motley Fool: Costco’s efficiency rewards employees, customers, investors
Costco (Nasdaq: COST) serves all its constituents well. It has delivered to shareholders gains averaging 15.7 percent annually over the past 20 years. It offers low prices to customers, marking up most products by no more than 14 percent over cost. (In 2013, its average markup was close to 11 percent.)
It treats its employees well, too, offering above-average wages and benefits, and in return enjoying a turnover rate of only 5 percent among those who have worked at the company for at least a year. (Customer turnover is low, too, with roughly 90 percent renewing memberships each year.)
The company also strives to do right by the rest of the world through its business practices. As of 2013, it had the second-largest solar power generation capacity among U.S. companies, and it has stopped selling some “at-risk” fish species.
Costco’s efficient business model allows it to consistently generate a strong return on invested capital. With annual revenue topping $110 billion, it’s growing much faster than other big-box retailers in part because it sells items in bulk, which causes some customers to overbuy.
Compared to rivals’ stocks, Costco’s shares aren’t priced at bargain levels, but they’re still likely to reward long-term investors. One promising new growth initiative is a move to start selling products online in China. (The Motley Fool owns shares of Costco and has recommended it.)
Ask the Fool
Q: What are activist investors? – P.T., St. Joseph, Michigan
A: Frequently tied to hedge funds or private-equity companies, they buy many shares of a company’s stock and aim to influence it. They’ll often secure seats on the company’s board of directors, too. Common goals for activist investors are making changes in top management, taking the company private, engaging in significant cost-cutting, splitting up the company, and spending heavily on dividends or share buybacks.
When an investor buys 5 percent or more of a company, he must file a 13D form with the SEC. That public filing can tip off observers to possible activist investor interest. Carl Icahn is one famous activist investor, who has pursued changes at companies such as Yahoo! and Time Warner. Recently, he’s been encouraging Family Dollar to merge with a fellow discounter.
Darden Restaurants, which operates the LongHorn Steakhouse and Olive Garden chains (among others), recently lost a battle with activist investors and had its entire board of directors replaced. Hertz, too, has given in to pressure, and is spinning off its equipment rental business. Meanwhile, PepsiCo has been pressured by Nelson Peltz to split up, in order to separate its beverage and salty snack businesses.
My dumbest investment
My dumbest investment? I sold 300 shares of Apple at $36 per share after a quick 20 percent increase! – G.C., San Diego
The Fool responds: Judging from the “Dumbest Investment” stories people send in to us, that’s a rather common blunder. Indeed, with shares of Apple recently trading near $96 per share, you lost out on a gain of more than 150 percent. Even worse, if your $36 sale price was before the company’s 7-for-1 stock split, then your split-adjusted sale price would be close to $5 per share, reflecting a gain of roughly 1,800 percent left on the table. Ouch.
Still, remember that hindsight is 20/20, and if at the time you no longer had much confidence in Apple’s future performance, or you thought its stock was more than fairly valued, then selling was the right thing to do. Investors need to make the most rational decisions they can, based on what they know and believe. And even if they do so, they’re likely to get some calls wrong now and then. Even Warren Buffett has made some mistakes.