Will These Stocks Ever Go On Sale?

One of my favorite Warren Buffett quotations boils down the complex world of investing to one simple strategy: "Whether we're talking about socks or stocks, I like buying quality merchandise when it's marked down."

That's it. That's how easy it is to turn $40 into $10 million in a lifetime. Find high-quality products on the sale rack and hang on to them for years. Even a caveman could do that.

But what if your favorite brands are the ones that never seem to go on sale? With Buffett's advice in mind, let's take a look at a few retail and restaurant brands to see if we can find some discounts.

The cream of the crop
As far as household names go, the following companies are about as familiar as you'll find -- unless, in fact, you are a caveman. But even then, there's a chance that you've come across Costco Wholesale (NASDAQ: COST  ) , Chipotle Mexican Grill  (NYSE: CMG  ) , and Whole Foods Market  (NASDAQ: WFM  )  during your days spent foraging around town.

In my opinion, all three of these companies are the best of the best in their respective industries. I would venture to say each is the most fit for survival over the long haul in the retail, restaurant, and grocery businesses. Their focus on customers, deep understanding of their products, and high-caliber employees allow them to consistently outrun competitors in terms of growth.

Over the past few years, for example, Costco grew revenue at 10.5% compared to an industry average of 5.5%. Chipotle grew its top line at a hefty 21.6%, versus a 7.6% growth rate from its peers. And what about the green grocer? Whole Foods grew nearly six times as fast as its average competitor: 12.8% versus 2.2%.

Impressed? That's only part of the story. Each company's net income growth left that of their respective peers in the dust.

 

While growth is nothing if it's not sustainable, these companies have shown over the course of multiple decades that they have sound operational game plans. Executing on the visions of their founders, Costco, Chipotle, and Whole Foods seem to be the epitome of top-notch businesses worthy of our investment dollars.

However, the quality of the business is only half of the equation, right? We might have identified the best merchandise available, but finding a bargain entry point is a different story.

The best -- at what price?
With great companies like these, a lot of savvy investors hit a roadblock because the price never seems "right." By most traditional measures, we haven't seen a sale on these stocks since the recession, and who's to say when another one might come along?

For instance, a common metric that investors fixate on to compare stocks is the price-to-earnings ratio. The P/E ratio gives an estimate of bang-for-your-buck in terms of how much you'll pay for $1 of a given company's earnings. While the price-to-cash flow might be a better gauge, for our purposes the P/E works just fine. The P/E is more widely available for industry data and works well for companies with little debt and simple business models. So, with that, let's take a closer look at the P/E ratios for Costco, Chipotle, and Whole Foods over the past four years.

COST PE Ratio (TTM) Chart

COST PE Ratio (TTM) data by YCharts.

As shown, not one of the P/E ratio trend lines hovered below 20 for any extended period of time. Costco dipped around that level in 2010, but quickly came up for air and remained around 25 for the next three years. This is striking.

First off, the broader stock market represented by the S&P 500 currently trades at a P/E multiple of 18.88. Even after its remarkable 26% gain over the past year, the market still looks cheaper (growth prospects aside) than all three companies did at any given point over the past four.

Second, investors looking to "buy on dips" never really saw an opportunity with Whole Foods or Costco over this time frame. Chipotle's lows on a P/E basis occurred in early 2010 and in the summer of 2012, but only for a relative bargain -- shares still traded at around 30 times earnings.

The last surprising element relates to the industries in which these companies operate. Each is a brick-and-mortar business at its core. Costco's online sales are picking up steam, but it still lagged behind sales of 16 other retailers as recently as 2012. For the most part, these are not the most easily scalable businesses. Without the promise of rampant growth, it's highly unusual to see these companies trading in a stratosphere typically reserved for the tech world.

Foolish takeaway
I know many investors who, as a result of these companies' lofty valuations, have shied away from pulling the trigger on them in recent years. Was it a savvy move, or are they waiting for a price that will never be "right"?

There's no true way to know. As long-term investors, we might have an opportunity to pounce when the market overreacts to a short-term earnings miss. For Fools, these opportunities are like an exclusive blowout sale at your favorite store -- that everyone else is missing out on!

But we might not have that opportunity. Either way, would we be better off buying a few shares, committing to a phenomenally well-run business and then hoping for an even better entry point down the road? Perhaps. The Motley Fool's co-founder Tom Gardner would say it's better to miss on the valuation side than to miss on the business side. I think Warren Buffett might agree. For these three companies, would you?

You can invest like the Oracle
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 


Read/Post Comments (15) | Recommend This Article (25)

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 January 11, 2014, at 12:19 PM, tednerry wrote:

    I'm getting confused by the SuperNova runup. I don't know what it includes, how it would impact my wide current Foolish portfolio, how much it costs and how much better could it be than the current results with Stock Adviser/

  • Report this Comment On January 11, 2014, at 12:34 PM, davidladler wrote:

    In get numerous emails from the Fool...don't understand what is the difference between them and why I have to keep entering my email address to get reports???

    As a subscriber I expect the best info available. Why is this channeled to various programs?

  • Report this Comment On January 11, 2014, at 12:36 PM, corpgov wrote:

    Well, over the last month WMF lost almost 6%. COST is down about 3%, while CMG is up about 2%... about the same as NASDAQ and S&P500.

    If you're hoping to buy on the dip, now might be the right time for WMF. Buy now and vote for my proposal to enhance confidential voting at the annual meeting.

  • Report this Comment On January 11, 2014, at 2:44 PM, heidi115 wrote:

    hi i am with davidladler what,s up with the switch and bait

  • Report this Comment On January 11, 2014, at 3:12 PM, TMFBoomer wrote:

    Folks,

    Here's a link to member support if you have questions about newsletter services.

    http://www.fool.com/help/index.htm?display=EmailSupport&...

    I'm happy to answer any questions about the article on this page.

    Isaac

    @TMFBoomer

  • Report this Comment On January 11, 2014, at 8:59 PM, hisaacs wrote:

    Why not increase the price on SA and stop bombarding us with all these teaser promotions.

    If a recommendation is so good why keep it secret from your subscribers. BTW, my e-mail is loaded with TMF mail. Who has time to read all this stuff.

    Just the facts, Man!!!

  • Report this Comment On January 11, 2014, at 9:23 PM, blakes wrote:

    getting all these emails about different services is very irritating and a considerable waste of time; expect better from TMF

  • Report this Comment On January 11, 2014, at 10:04 PM, fgatov wrote:

    The same applies to the videos. I'm getting tired of someone droning on in a monotone for half an hour or more just to leave me dangling in the air until I pay you another couple of hundred bucks.

    Just cut the crap guys and get straight to the point. You're becoming very boring.

  • Report this Comment On January 11, 2014, at 11:32 PM, bcellars wrote:

    I've gotta say, there's not much of anything useful in this article. WFM was on sale earlier this year, and it may be now. Or it may continue back down to near $40. Knowing that people nickname it "whole wallet" because its prices are so high keeps me away from this one. Quality doesn't have to be expensive and I suspect other quality food vendors will grow their market share.

    A rare 'sale' on COST just passed (Jan.8). It's been steady up for its share price since 2009, so any pullback of 5-10% is about as much as you can hope for. This is definitely a buy and forget about it stock.

    And CMG was a marvelous bargain in late 2012. I road that back up to $400 and decided take my gains and not be greedy. At current prices it's certainly not a bargain and it may stay flat for a long time, or it may suddenly go on sale again. Then again, it could take off to the upside again. I would sit and wait on it if I was interested and maybe put in a stop buy above $550 if you want to catch the next run up but not be exposed to a possible hard drop or have your money sitting and going nowhere.

    And I agree with the others comments that TMF can be really annoying with all their 'teasers' and repeated entering of your email. Pay a programmer a few dollars to fix that.

  • Report this Comment On January 12, 2014, at 12:16 AM, rahill58 wrote:

    Costco has a direct stock purchase plan, so instead of waiting on a sale use dollar cost averaging instead.

  • Report this Comment On January 12, 2014, at 9:57 AM, cmalek wrote:

    TMF has become no better than the rest of the stock report mills on Wall Street.

    I've been getting a"Dear China....It's Over" email from TMF 2 or 3 times a week for months now. All it is is a teaser trying to get me to sign up for one of the paid reports. Doesn't anybody at TMF realize that the situation described in the email is no longer current???!!! Do the morons in charge of these teaser emails believe that TMF readers are stupid and will believe any crap just because it comes from TMF?

  • Report this Comment On January 12, 2014, at 1:06 PM, EddySH wrote:

    Vote with your wallet and start requesting refunds for SA subscription fee. They likely won't pay attention until we SHOW them displeasure.

  • Report this Comment On January 13, 2014, at 9:47 AM, eddietheinvestor wrote:

    This Motley Fool article talks about what a quality company Whole Foods is and why investors should invest in Whole Foods Market. On the main Motley Fool page this past weekend and today, the headline reads, "Whole Foods Market co-CEO John Mackey Joins Motley Fool Board of Directors." The timing of this article, praising a company just when its founder joins the Fool board of directors and saying that investors should buy it because it's the best in its industry, is disturbing.

  • Report this Comment On January 13, 2014, at 10:18 AM, BioBat wrote:

    bcellars,

    People who call WFM whole paycheck or whole wallet just don't get their target audience. They aren't going after coupon clippers that shop at Kroger or Safeway, they're going after financially stable families that want to eat well and eat foods that aren't putting a burden on the environment. Call them limousine liberals if you want but they're the ones powering the company and have been doing so for years. That's why when I read of analysts saying WFM will be "pressured by Kroger" or "will feel the pain of economic downturn", I simply laugh and increase my position in WFM.

  • Report this Comment On January 18, 2014, at 8:54 PM, calanus wrote:

    I do not live near a WFM, but have twice visited one while visiting out of state. It was not located in an area that would be considered economically deprived by any standard. Prices were high, no question; even items on clearance were too expensive for my tastes. But they did have some of the best looking veggies I have seen in a long time. Their bulk coffees were also impossible to resist and not that far out of line for the quality. Did we spend some money there? You betcha! But not because they are cheaper than Kroger or Harris Teeter - we bought because of the quality and were willing to pay the premium for that quality. Our daughter does not buy the majority of her foods there, but does go out of her way to get specific items from WFM. In contrast, there is not a grocery store in my area that I would visit for anything specific - there is nothing that sets any one of them apart from the other. Hope that tells you what it tells me!

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