Every time Warren Buffett’s latest stock selection is announced, it often gets hit with the “Warren Premium,” as the shares leap on the news. After all, his selections are so successful that if all we did was purchase the same stocks, and held just as long, we’d all be rich.
The wrench in this plan, however, is we don’t get to time our purchases as Warren Buffett does. We don’t hear about them until six months after he jumps in. That doesn’t mean there isn’t value in the stocks he selects, it just might mean there isn’t as much value.
Still, suppose you are just starting out in the market and want to fill your portfolio with some of his selections. It depends on your own risk profile and investment horizon, but it’s always worth looking under the Buffett hood:
Have you ever been to Costco (NASDAQ:COST)? I have. I paid particular attention to the kind of shopping I did there and just how much I saved each time I went. After many years and many visits, I came to the conclusion that Costco not only saved me around 30% (even including the annual fee), but it also provided an intangible savings — namely, time. By buying in bulk, I never had to run out to buy paper towels or toilet paper over and over again. Or vodka. I like my vodka. I don’t like running out of it, so the big bottles of Grey Goose go over well in my house.
In addition, Costco doesn’t sell junk. It sells brand names or its own in-house brands that, in my opinion, are just as good. COST sells both staples and discretionary items. Frankly, it sells just about anything anyone could want.
Costco also has a wide moat, manages to make a huge profit and does so with gross margins under 15%. In other words, Costco makes money even though it sells stuff at low prices. COST has free cash flow eight years running, and manages to do it even while expanding. Plus, Costco still is growing around 9% annually. But the real thing that makes Costco great is that its membership fees account for around two-thirds of its cash flow. That is the blade to the Costco razor.
So should you buy? The answer is yes — but not at today’s price of $87. Warren Buffett purchased the stock in late 2009, at around $50. Wait for a big pullback.
How about Procter & Gamble
(NYSE:PG)? Here you run into a similar problem. Again, it’s a company that sells tons of basic necessities. Procter & Gamble also has fantastic ongoing free cash flow, has the protection of its brand and all the capital it could need to maintain its top position. The problem, however, is one of price. The company is slated to earn $4.56 per share next year and grow at about 8% annually. At a price of $65 per share, you’re looking at a price/earnings-to-growth ratio of 2 (where 1 is considered fair value). Costco’s is around 1.7, and that ain’t a bargain, so P&G is even worse.
Buffett bought into Procter & Gamble many, many years ago. It’s easy to see why, but it isn’t easy to hold your nose and buy at much higher prices. I think the only way you can emulate Warren Buffett in this case is to use the same P&G laundry detergent.
As of this writing, Lawrence Meyers did not hold a position in any of the aformentioned stocks.
