Compounder Fund: Costco Wholesale Corporation Investment Thesis

Compounder Fund: Costco Wholesale Corporation Investment Thesis - 10 Sep 2020

Data as of 9 September 2020

Costco Wholesale Corporation (NASDAQ: COST) is one of the 40 companies in Compounder Fund’s initial portfolio. This article describes our investment thesis for the company.

Company description

Costco, which is headquartered and listed in the USA, operates no-frills membership retail warehouses that offer low prices on a limited selection of branded and private-label products. In Singapore, there is no business similar to what Costco does. You can think of Costco as a company operating huge supermarkets (a Costco retail warehouse is 146,000 square feet on average, about two football fields in size) that sells a highly-curated selection of products at a big discount to other retailers. 

Costco warehouses offer products in the following categories: 

• Food and sundries (dry and packaged foods, groceries, snacks, beverages, confectionaries, cleaning supplies) 
• Hardlines (electronics, health and beauty aids, etc)
• Fresh food (meat, produce, deli, and bakery products)
• Soft lines (apparel and small appliances)
• Ancillaries (gasoline and pharmacy businesses). 

You can’t just walk into a Costco warehouse and start shopping – you have to first purchase an annual membership. The annual fee for a membership is US$60 in the US and Canada and varies in other countries. All paid memberships include a free household card. Cardholders can upgrade to an Executive membership for an additional US$60 per year. Executive members are entitled to a 2% reward on qualified purchases (up to US$1,000 per year in the US and Canada, and the limit varies for other countries). 

Costco sells many of its products in bulk. This means that if you shop at a Costco retail warehouse, you have to buy a fairly sizable amount of a particular product. Costco does this to lower prices for customers (the company believes that the prices of its merchandise are “consistently lower than elsewhere.”). By selling in bulk, Costco is able to purchase large volumes of a limited selection of items, and the purchase of large volumes brings the ability to negotiate better prices with suppliers. For perspective, a Costco retail warehouse carries an average of just 3,700 SKUs (stock keeping units), whereas the average supermarket in the USA has more than 30,000 SKUs.     

There are Costco retail warehouses in many countries in the world, including the USA, Canada, Mexico, the UK, Japan, Korea, Taiwan, Australia, Spain, Iceland, France, and China. The company also has e-commerce operations in the USA, Canada, Mexico, the UK, Korea, Taiwan, Japan, and Australia. In the 36 weeks ended 10 May 2020 – this is the first three quarters of the fiscal year ending early-September 2020 (FY2020) – Costco earned total revenue of US$113.4 billion. 73.4% of this revenue was from the USA, 13.3% was from Canada, and the other countries collectively accounted for the remaining 13.3%. In terms of product categories, the table below shows the sales breakdown for the first three quarters of FY2020; do note that the total sales number differs from total revenue because of membership fees.

Source: Costco FY2020 third-quarter earnings update

Investment thesis

We have laid out our investment framework in Compounder Fund’s website. We will use the framework to describe our investment thesis for Costco.

1. Revenues that are small in relation to a large and/or growing market, or revenues that are large in a fast-growing market

For the 12 months ended 10 May 2020, Costco’s total revenue was US$160.9 billion. As of 10 May 2020, the company had 787 warehouses worldwide (with 547 in the USA, and 100 in Canada), 55.8 million paid members, and 101.8 million cardholders. Just looking at the magnitude of these figures may make you wonder if there is any room for Costco to continue growing. But the reality is that Costco still commands only a tiny fraction of retail sales in the USA and elsewhere. For perspective, consider the following:

• Data from Statista show that total retail sales was US$5.47 trillion in the USA in 2019, and US$23.6 trillion globally in 2018. 
• In the year ended 31 January 2020, Walmart, a peer of Costco, earned US$524 billion in total revenue and had 11,500 stores around the world.   

There are two other things we want to highlight. First, Costco’s retail warehouses generate higher revenue as they age, as the charts below illustrate. For example, warehouses that were opened in 2007 produced average revenue of US$76 million each in FY2007, US$116 million in FY2011, and US$144 million in FY2015; meanwhile, warehouses that were opened in 2011 generated average revenue of US$120 million each in FY2011, US$139 million in FY2016, and US$170 million in FY2019. To us, these numbers mean two important things that bode well for Costco’s future growth prospects in the global retail market: (1) The company can generate healthy revenue growth from existing warehouses, and (2) the company still has plenty of room to open new warehouses across the world, since there’s no sign at all of cannibalisation.

Source: Costco FY2015 and FY2019 annual reports

Second, we think Costco has a huge international opportunity. As of 10 May 2020, just 220 of Costco’s 787 warehouses were located outside of the USA. Costco’s management shares our thought; the company mentioned the following in its earnings update for the third quarter of FY2020:

“Our rate of operating floor space square footage growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to continue”

Staying with the international opportunity, Costco seems wildly popular in China. In 2019, Costco opened its first warehouse in China (in Shanghai) to great fanfare; by the opening day, the China warehouse had 139,000 membership sign-ups. In March this year (keep in mind that this is with COVID-19 as a backdrop), Costco said that its China warehouse was one of its best-performing warehouses globally and that it had nearly five times as many members as the typical Costco-average of 68,000. 

2. A strong balance sheet with minimal or a reasonable amount of debt

As of 10 May 2020, Costco had US$11.77 billion in cash and short term investments against US$9.10 billion in debt. This puts the company in a strong net-cash position. 

For the sake of conservatism, we also note that Costco had operating lease liabilities of US$2.54 billion. But even when the operating lease liabilities are added to the total debt (sum of US$11.64 billion), it’s still lower than Costco’s cash and investments. Moreover, as we’ll show later, the company has an excellent long-term track record of generating free cash flow.

3. A management team with integrity, capability, and an innovative mindset

On integrity

Costco is led by its 68 year old CEO Craig Jelinek, a long-time Costco employee who joined the company in 1984 and steadily rose through the ranks. In 2004, Jelinek was promoted to Executive Vice President and was in charge of merchandising. In 2010, he became President and Chief Operating Officer, before succeeding Costco co-founder Jim Sinegal as CEO in 2012.

There are two key areas we look at when we think about the integrity of a company’s management team: The compensation structure and the level of insider ownership. The way a company’s leadership is compensated and whether they have skin in the game give us important clues on whether management is incentivised to treat the company’s other shareholders fairly. Charlie Munger has a well-known quip: “Show me the incentives and I will show you the outcome.”

We think that Costco’s compensation structure looks sensible. Here are the important points:

• In FY2019, Jelinek’s total compensation was US$8.02 million and 83.2% of this came from stock-based awards. These stock-based awards come in the form of performance-based restricted stock units (RSUs) that vest over time. By design, these RSUs are meant to vest over five years in equal increments (20% in each year). But Costco also has accelerated vesting schedules for employees with over 25 years of service. Jelinek qualified for accelerated vesting in FY2019 with 66% of his RSUs vesting on the date they were granted; the remaining RSUs will vest in equal increments over the next few years. 
• The criteria for the award of Jelinek’s performance-based RSUs in FY2019 was a 4% increase in total sales and a 3% increase in pre-tax income (both financial numbers exclude currency movements). We think the performance-bar can be higher, but it’s fine in the grand scheme of things.
• Jelinek’s total compensation in FY2019 is a rounding error when compared to Costco’s profit of US$3.66 billion in the same year. 
• Costco’s other senior leaders include Richard Galanti (Chief Financial Officer), Joseph Portera (Chief Operating Officer), Paul Moulton (Chief Information Officer), and James Murphy (Chief Operating Officer of Costco’s international business). They each enjoyed total compensation of between US$4.04 million and US$4.44 million in FY2019. The lion’s share (71.5% or more) of each of their total compensation came in the form of performance-based RSUs that have the same terms as Jelinek’s. We also want to highlight that Galanti, Portera, Moulton, and Murphy all qualified for accelerated vesting of their RSUs. This means they also have decades of service each with Costco – we appreciate the long tenures of Costco’s senior leadership team.

In our view, Costco also has a high level of insider ownership. As of 18 November 2019, Jelinek controlled 318,631 Costco shares. At the 9 September 2020 share price of US$339, Jelinek’s Costco stake is worth nearly US$108 million. In aggregate, Costco’s 18 directors and executive officers (including Jelinek) collectively controlled 965,107 shares of the company as of 18 November 2019; this collective stake amounts to US$327 million at Costco’s 9 September 2020 share price.

On capability and ability to innovate

We rate Costco’s management team really highly on capability and the ability to innovate. Here are some reasons why (in no particular order).

First, Costco’s leaders have a fanatical focus on lowering costs for customers, often at the expense of the company’s short-term gain. We think this is a simple but unreplicable competitive advantage for Costco because it so often goes against the very-human trait of greed. We want to share four telling examples of the unique mindset that Costco’s leaders have (the examples span both Jim Sinegal’s as well as Craig Jelinek’s tenures):

1. Inc. published an article in August 2019 about Costco and it said:

“Unlike the typical 25 to 50 percent or more markups at most retailers, Costco caps its mark-ups at 14 percent for outside brands and 15 percent for Kirkland (in-house) brands.

But in many cases the markup is significantly lower, which is why the average mark-up across all Costco products is 11 percent.”

2. According to a June 2019 article from The Hustle (emphasis is ours):

“Not long ago, Costco was selling Calvin Klein jeans for $29 a pop — already $20 less than almost anywhere else — when a change in its purchasing deal meant Costco could get them for even less from the vendor. Instead of keeping the extra profit from the improved deal, it lowered the jeans’ price to $22.”

3. From the same article from The Hustle (emphasis is ours):

“In the 2012 CNBC doc “Costco Craze,” a Costco buyer related one tale about a toy he found that retailed for $100. The company had the option of buying the unit for $50 wholesale and selling it for around $60 — but this wasn’t good enough.

Over a period of months, Costco ended up working with the vendor and its factory to redesign the toy from the ground up, analyzing every part of the process for ways to cut costs. In the end, Costco got the vendor to reduce the price by 50%, and sold it for $30.

The profit margin Costco made from the toy at $30 was the same it would’ve made at $60: The time and resources the company invested to lower the price were strictly for the benefit of their shoppers.”

4. Here’s an excerpt from a 2007 Wall Street Journal article (emphasis is ours):

“When the company signed a new contract in 2005 with a supplier for Brooks Brothers-style men’s cotton, button-down shirts, and got a significant price reduction for a massive two-year order, it immediately cut the price of the shirts to $12.99 from $17.99, notes Richard Galanti, Costco’s chief financial officer. Other retailers might have phased in the reduction and captured added profits, but that’s not the Costco way. The shirts now cost $14.99 because they are made with better-quality cotton.”

The four examples above show that Costco is willing to voluntarily lower the prices of its merchandise to give customers the best deals. And the company does this consistently. How many retailers are willing to do what Costco does? Not many, is our guess. And we think this is what gives Costco a lasting competitive advantage because the company’s actions give customers confidence that they can always get great (maybe even the best) prices at Costco.

Second, Costco’s management have been excellent at consistently (a) growing the number of Costco’s retail warehouses, (b) increasing Costco’s paid memberships, (c) maintaining a high membership renewal rate, and (d) producing positive comparable store sales growth, excluding gasoline-price and currency changes. (Comparable store sales growth measures the change in period-over-period revenue for Costco’s retail warehouses and websites that have been in operation for 12 months or more as of the reporting period.) All these are shown in the table below. We chose FY2007 as the starting point to observe how the company fared during the 2008-09 Great Financial Crisis. Earlier, we mentioned that there’s no sign at all of cannibalisation when Costco opens new stores. There’s another data point to support this view: Costco’s comparable store sales growth (excluding gasoline-price and currency changes) was positive in each year from FY2007 to FY2019. 

Source: Costco annual reports

Third, Costco has stuck to its operational model of only selling a relatively small number of items. For instance, the company carried only 4,000 or so SKUs in FY2007 – this is similar to the 3,700 SKUs the company has currently. We see this as a positive sign on the company’s focus.

Fourth, Craig Jelinek has an 89% Glassdoor approval rating as CEO. In comparison, the average approval rating for CEOs on Glassdoor is just 69%. Jelinek’s high rating is not surprising when we looked at how Costco treats its employees (very well). For instance, Costco raised compensation for its employees during the current COVID-19 outbreak to reward “exemplary service in difficult times.” Here are some other great examples from a brilliant 2013 Bloomberg article:

“In 2009, as the recession deepened, his bosses [at Costco] handed out raises. “I’m just grateful to come here to work every day,” he says…

… Despite the sagging economy and challenges to the industry, Costco pays its hourly workers an average of $20.89 an hour, not including overtime (vs. the minimum wage of $7.25 an hour). By comparison, Walmart said its average wage for full-time employees in the U.S. is $12.67 an hour, according to a letter it sent in April to activist Ralph Nader. Eighty-eight percent of Costco employees have company-sponsored health insurance; Walmart says that “more than half” of its do. Costco workers with coverage pay premiums that amount to less than 10 percent of the overall cost of their plans…

… Costco went public in 1985, and over the years, Wall Street repeatedly asked it to reduce wages and health benefits. Sinegal instead boosted them every three years.

As the economic downturn worsened in the fall of 2009, Costco, like every other retailer, started seeing declines in same-store sales. Macy’s, Best Buy, Home Depot, and Office Depot were resorting to layoffs and wage cuts, but Sinegal approved a $1.50-an-hour wage increase for hourly employees, spread out over three years. “The first thing out of Jim’s mouth was, ‘This economy is bad. We should be figuring out how to give them more, not less,’ ” says CFO Galanti, who adds that Sinegal’s decision to parcel out the raise in three annual 50-cent increments, instead of more gradually, cost an extra $20 million. The founder’s stubborn resolve remains a point of pride. “Could Costco make more money if the average wage was two or three dollars lower?” asks Galanti. “The answer is yes. But we’re not going to do it.”

Fifth (which is related to the fourth point), we think Costco’s leaders have created a unique corporate culture. The 2013 Bloomberg article we mentioned earlier has some great passages on the matter: 

“In February, Jelinek set Costco’s convictions in ink, writing a public letter at the behest of Nader, urging Congress to increase the federal minimum wage for the first time since 2009. “We know it’s a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty,” he wrote…

…Beyond Amazon, another pressing issue is the age of the company’s executive team, most of whom are in their late 50s. “We’re all old,” says Brotman, who is 70. Jelinek says his team talks about succession planning constantly and recently expanded a program to ready the next wave of company leaders.

It will have to look inside, since Costco does not hire business school graduates—thanks to another idiosyncrasy meant to preserve its distinct company culture. It cultivates employees who work the floor in its warehouses and sponsors them through graduate school. Seventy percent of its warehouse managers started at the company by pushing carts and ringing cash registers. Employees rarely leave: The company turnover rate is 5 percent among employees who have been there over a year, and less than 1 percent among the executive ranks. That’s impressive, but it also suggests the company does not have a regular influx of outside views. Even John Matthews, vice president in charge of human resources, calls the company “awfully inbred.””

Sixth, Costco’s e-commerce efforts are starting to gain traction after lacklustre performances in recent years. In FY2015, e-commerce sales made up just 3% of Costco’s total sales and this percentage had inched up to only 4% in FY2019. But in 2019, the company made  same-day grocery delivery available to members within a 20-minute drive of 99% of its US locations. In the third quarter of FY2020, Costco’s e-commerce sales surged 65% from a year ago and the strong performance has carried on (in the form of strong comparable store sales growth for the e-commerce operations) for the rest of FY2020 as shown in the table below. Costco’s e-commerce results are driven by the presence of COVID-19, so there’s luck involved. But we think the company still deserves credit for grasping the opportunity stunningly well.

Source: Costco monthly sales updates

Seven, Costco is continuing to invest in its business even during the COVID-19 pandemic. The company is on track to open another 10 new warehouses (including two relocations) in the fourth quarter of FY2020, and has earmarked between US$740 million to US$940 million in capital spending for the quarter. For perspective, Costco’s capital expenditure in the fourth quarter of FY2019 was US$1.01 billion.

Eight, the venerable Charlie Munger is on Costco’s board of directors. Munger is one of our investment heroes and he is the long-time second-in-command at Warren Buffett’s investment conglomerate Berkshire Hathaway (Buffett is one of our investment heroes too). Munger has served as a director of Costco since January 1997 and we think having him on Costco’s board allows the company’s management to tap on an invaluable source of knowledge. 

4. Revenue streams that are recurring in nature, either through contracts or customer-behaviour

As mentioned earlier, Costco has long had high membership renewal rates, so we have reason to believe that members keep coming back to Costco’s warehouses to shop. This behaviour creates a recurring revenue stream for Costco, in the form of recurrent membership fees as well as repeat purchases. 

It also helps that a large part of Costco’s sales are in fast-moving consumer goods. We showed earlier that collectively, the merchandise categories of Food and Sundries, Fresh Foods, and Ancillary make up nearly 73% of Costco’s total sales in the first three quarters of FY2020.

5. A proven ability to grow

Costco has been a steady grower for many years. The table below shows the company’s important financial data going back to FY2007 (we picked FY2007 as the starting point to observe how the company fared during the 2008-09 Great Financial Crisis):

Source: Costco annual reports

A few things we note for Costco’s financials:

• The company’s revenue growth has been consistent, with growth in nearly every year for the entire time period we’re looking at. The only year that Costco experienced a decline in revenue was in FY2009 (which was during the Great Financial Crisis period) and even then, revenue dipped by only 1.5%. Costco’s revenue compounded at 7.5% annually from FY2007 to FY2019, and at 6.3% per year from FY2014 to FY2019. 
• Costco was solidly profitable for the entire time period under study (even during the Great Financial Crisis) and the company’s profit-growth was also consistent, with only a handful of down-years. The compound annual growth rates have also been healthy at 10.7% from FY2007 to FY2019, and 12.2% from FY2014 to FY2019. 
• Since FY2007, operating cash flow and free cash flow have both been (1) growing steadily and (2) consistently positive. From FY2007 to FY2019, Costco’s operating cash flow increased by 9.7% per year and the annual growth rate from FY2014 to FY2019 is similar at 9.8%. Free cash flow climbed at a faster pace with compound annual growth rates of 13.9% (for FY2007 to FY2019) and 11.0% (for FY2014 to FY2019). It is worth highlighting that in FY2016, Costco’s free cash flow dropped because of changes to the timing that Costco pays its suppliers. The company reversed that the following year and reported a large bump in free cash flow in FY2017.
• Costco has been operating in a financially conservative way and we like this. The company’s balance sheet had mostly been in a net-cash position (meaning cash and short-term investments outweigh all borrowings) from FY2007 to FY2019. Even when there was a net-debt position, Costco had ample free cash flow to make up the shortfall.
• There has not been any dilution at Costco given that the company’s share count has not increased in any noticeable way.

We have another interesting observation about Costco’s financials that is shown in the table below. You can see that the company’s membership fees have closely tracked its net profit over the years. This also means that Costco is essentially running its retail operations at “cost” and it’s only the membership fees that allow the company to earn a profit. There are two insights we can infer from this information. First, winning new members and maintaining a high membership renewal rate is important for Costco’s future profit growth. Thankfully, the company has excelled on both counts in the past. Second, this is further proof of Costco’s fanatical focus on lowering prices for customers. If lowering prices were no longer a focus, Costco’s profit would likely start to come in significantly higher than the membership fees – this would boost Costco’s short-term business performance but we think it will be to the company’s long-term detriment. To be clear, we do not want to see Costco’s profit be significantly higher than its membership fees.

Source: Costco annual reports

The USA is currently suffering because of COVID-19. The country has the highest number of COVID-19 cases and deaths in the world, and its GDP fell by 9.1% from a year ago in the second quarter of 2020. But despite the troubles in the USA as a backdrop, Costco’s business has still fared reasonably well. Here’s a table illustrating Costco’s financial results in the second and third quarters of FY2020 (this two periods cover the 24 weeks ended 10 May 2020):

Source: Costco quarterly earnings updates (free cash flow in the second quarter of FY2019 was a negative US$806 million)

In its earnings update for the third quarter of FY2020, Costco commented that COVID-19 has brought both positive and negative impacts to its business. The company experienced a “significant sales shift from [its] ancillary and other businesses to certain of [its] core merchandise categories, primarily food and sundries and fresh foods.” And as the table above shows, the company had enjoyed healthy revenue growth in the second and third quarters of FY2020. E-commerce sales also jumped by 65% in the third quarter of FY2020, as we mentioned earlier. Comparable store sales growth in both the second and third quarters of FY2020 were strong too, at 8% each (this excludes the impact of changes in foreign currency and gasoline prices). 

Although Costco has yet to report its official financials for the fourth quarter of FY2020, the company has a tradition of reporting its monthly sales figures before the official financials are released. The months of May, June, July, and August have been great for Costco too, in terms of sales. This is shown in the table below:

Source: Costco monthly sales updates

6. A high likelihood of generating a strong and growing stream of free cash flow in the future

We think Costco excels in this criterion for two reasons.

First, Costco has been consistently generating free cash flow for many years – even during the Great Financial Crisis – as we showed earlier.

Second, we believe that Costco’s free cash flow is likely to grow at a healthy clip from here, since there’s still plenty of room for the company to grow its business in the USA and there’s even more room for expansion in international markets. 

Valuation

We like to keep things simple in the valuation process. In Costco’s case, we think the price-to-earnings (P/E) and price-to-free cash flow (P/FCF) ratios are appropriate metrics to value the company, since it has been adept at producing profits and free cash flow for a long time.

We bought Costco shares for Compounder Fund at an average price of US$326 each and we completed our purchases in late-July 2020. At our average price and on the day we completed our purchases, Costco shares had trailing P/E and P/FCF ratios of 38.9 and 36.6, respectively. These ratios are on the wrong side of 30, and are also high relative to their histories. The chart below shows Costco’s P/E and P/FCF ratios over the last five years.

But we think the odds of Costco generating a solid long-term compounded return for Compounder Fund are still firmly in our favour. The company has a large market opportunity and crucially, we think there’s a very high probability that Costco will be able to reliably grow its profit and free cash flow at a low-teens rate in the years ahead. The combination of a sizable growth opportunity and having a high probability of growth is a trait that we think the market prizes – and this can be found in Costco.

For perspective, Costco carried P/E and P/FCF ratios of 40.5 and 38.1 at the 9 September 2020 share price of US$339.

The risks involved

Costco is a company with a remarkably solid business, in our view. But it is not free from risks. Here are a few we’re watching:

• Overseas expansion risk: Part of our investment thesis for Costco is that its international business will see strong growth in the years ahead. But consumers in different geographies have specific merchandise preferences. Part of Costco’s magic is the merchandising team’s ability to curate the merchandise that are sold in the company’s retail warehouses. The merchandising team may not be able to curate well at scale for Costco’s international business, especially in geographies that are relatively new for the company. 
• Succession risk: Costco has been led masterfully by current CEO Craig Jelinek. He has been with Costco for more than 30 years and it’s clear to us that he knows the secret sauce behind Costco’s success and that he is determined to maintain the culture that Costco’s founders, Jeffrey Brotman and James Sinegal, have created. We think this has been critical to Costco’s success over the years. But at 68 years old now, Jelinek may not have many more years left in the tank to serve Costco. We have faith that Costco’s board will choose a capable successor when Jelinek eventually steps down. But if there are any leadership changes, you can be sure that we will be keeping a close eye on the situation.
• Competition from e-commerce: As a brick-and-mortar retailer, Costco has managed to grow despite the rise of e-commerce over the past decade-plus period. Costco has built up a reputation for a low-cost no-frills shopping experience that members love, and its e-commerce initiatives have started to gain traction in recent months. But Costco’s prowess in the e-commerce space does not seem anywhere near as potent as in the realm of physical retail. We do believe that shoppers will continue to flock to Costco’s retail warehouses in droves, but there’s no guarantee this will happen.
• Valuation compression: Earlier, we mentioned that Costco deserves a premium valuation. The company offers investors the safety of a solid business that is able to grow at a decent pace for years. But there’s no sure thing in the world of business. If there’s a hiccup in Costco’s business-execution, its valuation ratios could fall.

Summary and allocation commentary

To summarise, Costco:

• Still only has a tiny share of the retail market in the USA and elsewhere, which signifies room for growth, despite already having trailing revenue of US$160.9 billion 
• Has a strong balance sheet with a high net-cash position
• Has a sensible compensation structure and an excellent management team that is led by CEO Craig Jelinek
• Has high membership renewal rates, suggesting that (1) customers love shopping at Costco’s retail warehouses, and (2) the company’s revenue is recurring in nature due to repeat customer purchases
• Has a solid long-term track record of growing its business
• Has consistently produced positive free cash flow for a long time and is likely to generate a growing stream of free cash flow in the future.

There are risks to note, such as the potential for overseas expansion plans to fail; succession risk; the threat of e-commerce; and a high valuation. 

After weighing the pros and cons, we initiated a 2.5% position in Costco – a medium-sized allocation – with Compounder Fund’s initial capital. We think Costco offers the awesome combination of having a large market opportunity and a high probability of being able to grow at a decent pace for the long run. But at the same time, we’re also aware that Costco’s historical growth rates are not the fastest, and it does carry a high valuation. So we think a medium-sized allocation is the sensible approach.

And here’s an important disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation; they are merely our thoughts that we want to share.