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Rising Stars Buy Recommendation: Costco

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This article is part of our Rising Stars Portfolio series.

Believe it or not, a warehouse retailer with fluorescent lights and concrete floors has social responsibility at its heart. This month's pick for my socially responsible portfolio is Costco (Nasdaq: COST  ) .

The business
Costco sells bulk goods for discount prices in a series of gigantic warehouses. It's not the only company with this business model, naturally; similar rivals include Wal-Mart's (NYSE: WMT  ) Sam's Club and BJ's Wholesale (NYSE: BJ  ) .

However, Costco's always enjoyed a touch of a higher-end cachet. It sells a smattering of luxury goods such as jewelry and branded clothing at dirt cheap prices, and part of its major allure is the "treasure hunt" principle. If shoppers see something special and don't buy it on the spot, the next time they come, it will likely be gone.

This retailer also attracts a more affluent demographic than many discount retailers. Many of its clientele are small business owners, and Costco charges an annual fee for membership in this "club" of cost savings.

Costco's popularity is reflected in its solid profitability. Over the last four quarters, earnings increased 20%, while sales increased 9.1%. Same-store sales ticked up an impressive 7%. It's also got a clean balance sheet, with $4.7 billion in cash and a very reasonable total debt-to-capital ratio of 17.6%.

Why I'm buying
Beyond the giant rafts of toilet paper and bulk boxes of granola bars, Costco boasts several elements that socially responsible investors will welcome.

Costco's well known for resisting Wall Street pressure to drive more profitability by cutting employee health care and other costs, even when many other retailers have been stingy about such "expensive" benefits.

Along those lines, Costco CEO Jim Sinegal has stood strong for building the kind of long-term business that cares about communities and workers. In 2008, he told Fast Company, "We're trying to build a company that's going to be here 50 and 60 years from now. We owe that to the communities where we do business. We owe that to our employees, that they can count on us for security."

In fact, Costco pays its workers more than most retailers. Last July, Bloomberg reported on rival Wal-Mart's well-known labor issues, noting that the Bureau of Labor Statistics data says U.S. retail workers overall take home an average of $11.84 per hour. By comparison, Costco pays its employees about $11.00 per hour to start, and its average hourly pay for its American employees is $19.76.

Jim Sinegal is a down-to-earth leader who comes across as more passionate about building a solid business than lining his own pocket at shareholder and worker expense. He happens to be a modestly compensated American CEO; his base salary of $350,000 has remained the same for years now.

Last but not least, providing low prices for shoppers is arguably a socially responsible endeavor, especially when a good portion of those shoppers are small businesses. These businesses are the lifeblood of our economic engine, and Costco's low prices help them in their ongoing struggle to survive and thrive.

Costco's being built for the long haul, with management that seems driven to do the right thing. It's perfect for this portfolio.

And now, the risks
Sorry, folks: Costco is a discounter, but it's not a deeply discounted stock. However, I consider it a premium company that's worth a premium share price, if you're willing to hold for the long term. It trades at 24 times trailing earnings, far pricier than major rivals such as Wal-Mart and Target (NYSE: TGT  ) , which you can get for 13.5 and 15.5 times earnings, respectively.

Providing discounted goods to consumers is a highly competitive retail segment. In some ways, Costco competes with everybody. On the low end, it contends with Wal-Mart, Target, and BJ's, along with the many other retailers also offering cut-rate goods for bargain-hunting consumers, like Big Lots (NYSE: BIG  ) and Family Dollar (NYSE: FDO  ) . On the high end, the same affluent shoppers who troll its aisles for luxury merchandise could easily be lured away to more prestigious stores.

Last but not least, if a bad economy or excessive regulation drives too many small businesses into the ground, or stunt entrepreneurs' ability to start new ones, the lack of small-business customers could hurt Costco.

My Foolish bottom line
Costco is a gold standard among retailers, and a wonderful stock to own for the long, long haul. The multitude of its policies directed at fostering healthy communities in which to live and work implies that this company's not only positioned well for the future, but will also face far fewer growth hurdles in the coming decades.

Don't sweat the price -- celebrate the philosophy. Costco's got bulk social responsibility at its core, and buying in now is a sound strategy.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).

Costco and Wal-Mart are Motley Fool Inside Value picks. Costco is a Motley Fool Stock Advisor choice. Wal-Mart is a Motley Fool Global Gains selection. The Fool owns shares of Costco, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (35)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 06, 2010, at 3:32 PM, daveefreedom wrote:

    I like going to Costco for lower price gasoline. I also like the CEO Jim Sinegal and the fact that you can still get a Coke for $0.59.

  • Report this Comment On December 06, 2010, at 6:58 PM, CPACAPitalist wrote:

    Costco is an awesome company. I had a chance to meet Jim Sinegal at an conference in Seattle a few years back, and was impressed. I bought Costco a while back and am up around 40% and am not selling anytime soon.

    Another awesome thing about Costco is their food court - where else can you get a big hot dog and soda with refills for $1.50 still? {:-)

  • Report this Comment On December 07, 2010, at 2:00 PM, Corporality wrote:

    Love your Socially Responsible Portfolio, Alyce! It is so good to see The Fool is showing it is about more than what Buffet said and claims of "poly baggers". Thank you! I am a fan!

  • Report this Comment On August 31, 2011, at 11:53 AM, Seek100 wrote:

    where can I find this portfolio?

  • Report this Comment On November 17, 2011, at 9:32 AM, ThePoulTrend wrote:

    Costco is a Wonderful Long Term Investment!! There is no questions about it, not only are they packed from the time the doors open. They have customers that continue to come back. Did I mention customers pay a premium to use the Services. The Premium is definitively worth it, not to mention you should of seen what Costco did in the North East the last storm of which took out power across the region for up to two weeks. They hauled as many generators as they could from surrounding warehouses to the states which got hit hard. That's customer service. One last thing, Demo's at Costco are great, not many places use them, and they do wonders on catching someones taste buds to make an extra sale.

    Downsides However that Worry Me.

    1. (Have a Ladder System for Employees)

    2. (Under staff their stores, of which causes for delays, and ultimately no guidance on the floor)

    3. (Continue to up Card Costs)

    4. (Having Difficulties getting more Gas Stations)

    5. (Wasted space, Really need to rework the store floor plan layout.) As I think this could boost, sales, and profits.

    6. (Pay + Benefits) I am all for them paying their customers well, however I could see it changing someday, as the Average Paid worker in America is $19.76 sounds crazy to me. With this being said Costco will be less of a company to hire customers, and when they do being more so to Fire Prior to a year, for benefit Purposes. A Statistic of which I think should be looked into as It would not surprise me that, Many Workers get Fired Prior to getting Insurance Benefits or Raises. (May be Wrong, But Close Friend who works their gave me the insight.)

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