COST Costco Wholesale Corporation

Valuation

Big Five 13/15 tests ≥10%

Wonderful-business markers 90% of known markers passed · what these mean

• ✔ ROIC ≥10% in 8 of 10 yearspassed
• ✔ ROIC not fallingpassed
• ✔ Sales, profit and cash flow growing togetherpassed
• ✔ Stable margins (pricing power)passed
• ✘ FCF ≥10% of revenuefailed
• ✔ Cash is real (owner earnings ≥75% of profit)passed
• ✔ Debt ≤2 years of FCFpassed
• ✔ No share dilutionpassed
• ✔ Revenue up in 8 of 10 yearspassed
• ✔ Held up in 2020passed

Discussed on InvestED 8 episodes

• 365 · Pricing Power (Part 2)
  The hosts finish the CNN list of companies raising prices (Norwegian Cruise Line, Smucker, Monster, Hormel's Spam, Newell, Walmart) and keep repeating the same warning: a strong moat is only half the job, because you still have to buy at a margin-of-safety price.
• 003 · Finding a Competitive Advantage
  Munger's second filter asks for "intrinsic characteristics" that give a durable competitive advantage. Phil boils these down to five kinds of moat (brand, secrets, switching, toll bridge and price) and shows each with a real company.
• 017 · How to Read a 10-K Report
  Phil walks through a real 10-K (Whole Foods) live, showing which three sections to read first, how to judge whether you are capable of understanding the business, and how to find and size up its peers.
• 018 · Understanding the Business With a 10-K
  Phil recaps the five kinds of moat (brand, switching, secrets, toll bridge, price), then shows how to find a company's own claim of competitive advantage in its 10-K and test it against what you see in the stores.
• 082 · Back to Basics: Finding the Moat (Part 3)
  Real estate and businesses share the same financial statements and the same question about moats; the hosts then work through Coca-Cola, Wells Fargo and 21st Century Fox, disagree about whether Fox has a toll bridge, and conclude that a business that is too hard goes in the too-hard pile.
• 099 · Charlie Munger's Investing Points at Daily Journal Annual Meeting
  Phil and Danielle play and unpack four Munger answers from the 2017 Daily Journal meeting: keep learning and change your mind, keep getting back up after mistakes, index funds can't work perfectly forever, and diversification is for people who don't know what they are doing.
• 118 · Amazon, Whole Foods & Selling a Company You Love
  Danielle's first holding, Whole Foods, is bought by Amazon at $42 a share, so Phil and Danielle work out her return (basis, dividends, ex-dividend dates), explain why the stock traded above the deal price, and use merger arbitrage and Long-Term Capital as examples of speculation.
• 120 · The Investing Strategy that Never Goes Out of Style
  Buffett and Munger, in their 90s, still wait patiently in cash for a wonderful business on sale, which Phil says is why a patient individual can beat institutions, and the rest of the episode discusses Amazon's possible reasons for buying Whole Foods before a promised return to the margin-of-safety