Of all the world's great businesses, few can claim the same level of success as Costco Wholesale (COST +1.10%) in creating shareholder value -- and not just for its earliest investors. Though Costco held its initial public offering in December 1985, investors who bought shares a full decade later, in December 1995, have watched the value of their shares climb more than 18-fold -- and that's not including the dividends Costco has paid since 2004.
That raises the question: Where can investors find the next Costco? To that end, We asked three top Motley Fool investors to each discuss a stock they believe still has Costco-like return potential. Read on to learn why they chose Amazon.com (AMZN 1.52%), Tile Shop Holdings (TTS +2.94%), and Wal-Mart (WMT +1.47%).
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This winner will keep on winning
Steve Symington (Amazon): When I think about companies that have Costco-esque return potential, I'm looking for established businesses with room to grow that aren't easily disrupted. Or better yet, a business that actually does the disrupting in any given industry. In that case, the first company to come to mind is Amazon.com.
To be fair, Amazon has already delivered incredible gains for early investors. Shares of the online retail juggernaut have skyrocketed more than 1,100% over the past decade alone, and Amazon is currently more than six times the size of Costco as measured by market capitalization. So, how much more can Amazon climb?
For one, it's worth noting that many Costco investors likely expressed the same concerns during its ascent; Costco stock more than quintupled between the early 90s and the turn of the century, then went on to more than triple between then and now, even after enduring the massive market meltdowns of 2000 and 2008. In the end, Costco's difficult-to-disrupt business prevailed, and it proved to be a winner that kept on winning.
But Amazon isn't just a dominant force in the massive e-commerce market. It also commands an enormous share of the cloud infrastructure services market through its massively profitable Amazon Web Services segment, which Amazon founder and CEO Jeff Bezos predicts could grow to be the company's single largest business over the long term.
If that wasn't enough, Amazon regularly tests the waters to expand its scope even further. Most recently, that meant upending the grocery market with the completion of its $13.7 billion acquisition of Whole Foods last month, where it promptly slashed prices on many of the organic grocer's most popular items. That's also not to mention the potential for other bets like Amazon Vehicles to fundamentally change the way we buy cars, or for Amazon's automated drone delivery to further extend the lead of its core retail business.
In the end, I can't envision a future where, decades from now, Amazon isn't an even bigger part of our lives than it is today. And it seems inevitable that its share price will follow suit.
A beaten-down retailer with huge growth ahead of it
Jason Hall (Tile Shop Holdings, Inc.): Shares of specialty retailer Tile Shop are down more than 23% since it announced second-quarter earnings in July, following a disappointing quarter of same-store sales that came in flat while the market was expecting growth. Factor in some fears that Tile Shop could be affected by the bigger e-commerce trend, and the stock took a beating and hasn't exactly bounced back over the summer.
But from where I'm standing, Tile Shop is an absolute long-term buy today, and for several reasons. First off, management said on the earnings call that the flat comps result was the product of a single bad month at the start of the quarter (in part due to closing its stores on Easter Sunday), while comps returned to mid single-digit comps growth the rest of the quarter.
Second, the company is far better-run under CEO Chris Homeister than it was under former CEO and founder Bob Rucker. Homeister has made investing in store employees a priority, significantly improving retention of veteran managers and sales staff, which has paid off in sales and profits growth. Tile Shop has slashed debt, cut new store opening costs by 29%, and positioned the company for years more growth.
And with 133 stores and a market cap below $900 million, there's a lot of growth to come. Given a couple of decades to expand, Tile Shop is poised for big multibagger returns.
Who says elephants can't dance?
Chuck Saletta (Wal-Mart): In the world of retail, there's no bigger company than Wal-Mart. Often characterized as a lumbering behemoth, many people overlook it as a potential investment, considering it a relic of a bygone era in bricks-and-mortar retailing. Well, over the past several months, that behemoth has radically reinvented itself and is now leveraging its strength in physical retail to effectively compete with online retailers as well.
Since acquiring Jet.com, Wal-Mart has dramatically beefed up its "bricks and clicks" strategy, with a strong order online, pickup in store program. That program has driven an astonishing 60% growth in the company's online sales without cannibalizing its in-store sales. Indeed, if anything, bringing people to the store based on their online order gives Wal-Mart a chance to extend the trip to also include in-store shopping, potentially helping the two ecosystems build off of each other.
It's a brilliant move that's driving growth for Wal-Mart, and it's proving to be a great strategy for enabling online shopping for groceries, a market that had proven tough for online retailers to crack. By turning its huge physical presence into a strong tool for growing online sales, Wal-Mart is showing a path to future growth, providing a great foundation for potential future returns for its investors.
