Invest in Companies You Love: Costco, Apple, and CarMax

Costco, Apple, and CarMax know how to please their customers. This means that they have good chances of making shareholders happy in the long term.

Andrés Cardenal
Andrés Cardenal
Apr 20, 2014 at 1:49PM
Consumer Goods

"If you like the store, chances are you´ll love the stock."
-- Peter Lynch

Making smart investment decisions does not need to be too complex or sophisticated. In fact, our experiences as consumers can lead to very profitable investment ideas. Companies such as Costco (NASDAQ:COST), Apple (NASDAQ:AAPL), and CarMax (NYSE:KMX) know how to make their customers happy; this means they can also make shareholders wealthy over time.

Costco and the value of customer loyalty
Based on data from the American Customer Satisfaction Index, Costco leaves its competitors in the dust when it comes to customer satisfaction. The company has a score of 84, the highest one in the group, and considerably higher than the sector average of 80.

Source: Costco

Customers seem to really a appreciate the conveniently low prices and high-quality service that come with a Costco membership. Renewal rates are usually above 85%, and the latest quarter was no exception at all: Costco reported a global renewal rate of 86.5% and an increase of 13% in new membership signups during the quarter ended on Feb. 16.

Costco's membership-based business model allows the company to sell its products at wholesale prices, because it makes the majority of its profits from membership fees. This is not only a competitive advantage for Costco in terms of price leadership, it also provides stability and reliability to its cash flows because the company collects fees in advance. This reduces dependency on sales and exposure to the economic cycle.

Costco is planning to end the current fiscal year with approximately 30 new stores. This is a material acceleration versus the roughly 15 new stores per year the company was building two years ago. The company has plenty of room for expansion, both in the U.S. and abroad, and a growing and satisfied customer base bodes well for investors in Costco during the years ahead.

A sweet and desirable Apple
According to Interbrand, Apple is the most valuable brand in the world. There is always a considerable degree of subjectivity when it comes to these rankings; however, there is no denying the fact that the Apple brand, and its reputation for quality and superior customer experience, are enormously valuable assets for investors in the company.

Source: Apple

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When it comes to smartphones, the American Customer Satisfaction Index gives Apple a ranking of 81, much higher than the average for the industry of 76, which is the same ranking assigned to its leading competitor Samsung.

According to CEO Tim Cook during Apple´s latest earnings press conference:

iPhone customers are loving their phones, and continue to produce the highest loyalty rates in the industry. A December survey of U.S. customers by ChangeWave indicated a 96% customer satisfaction rate for iPhone. And based on the latest data provided by Kantar, iPhone customers have a 90% loyalty rate, significantly higher than the competition.

Apple is facing growing competition from Android-operated devices selling for considerably lower prices. This represents a challenge for the company when it comes to growth in emerging markets. However, in areas such as quality reputation, and customer loyalty, Apple's position is stronger than ever.

CarMax: The way car buying should be
Used-car dealers don't typically have the best reputations. In fact, many consumers are usually apprehensive when it comes to dealing with pushy sales employees and offerings that can sometimes be tricky and obscure. On the other hand, CarMax is no average used-car dealer by any means. The company's slogan, "The way car buying should be," says a lot about CarMax and its differentiated business strategy.

Source: CarMax

CarMax has a no-haggle pricing policy, which makes the negotiation process much simpler and more comfortable. Employees work on fixed commissions, so they make the same amount of money regardless of which car the customer buys. This means that they don't have the incentive to push cars that generate higher margins for the company, and they can focus on finding the best vehicle for each customer.

The process is also more transparent. The price of the car the customer is buying does not change depending on factors like vehicle trade-ins, and customers get to see the same information as the sales associate on a computer screen.

This innovative approach to the business resonates remarkably well with customers; 93% of clients say they would recommend CarMax to a friend. The company is doing a sound job at differentiating from the competition and earning the trust of its customers, a scarce and valuable attribute in the business.

Foolish takeaway
When looking for investment ideas, it makes a lot of sense to consider the information and experience we gather as consumers, because companies that are commercially successful can, many times, deliver superior returns for shareholders. Costco, Apple, and CarMax know how to please their customers; this means they have good chances of outperforming the market in the long term.