How to Use Costco to Pick Stocks

For many years Costco has had net sales of over $100 Billion with over 750 warehouses worldwide (http://investor.costco.com/). Anyone who has ever shopped at one of these warehouses knows that they are constantly packed with an efficient system of helping shoppers complete their purchases. The products offered both through their website and in their warehouses are high quality and adequately packaged for both consumer and wholesaler use. Although the warehouses feel like they go on forever they do have limited storage space requiring Costco to be selective in the products they offer. With this type of distribution power investors can look to Costco as an indicator of which stocks to buy.

Using Costco as a stock picking indicator can occur in two ways. For those without a membership an examination of their website will indicate which brands/companies are available through Costco. The brands/companies can then be researched through other methods before making any investment decisions.

Those of us with memberships have an added advantage of being able to enter the stores and observe consumer behaviour firsthand as part of our investment research. This strategy can be accomplished using the following steps:

1) Using the website identify which products you are interested in observing.

Costco.ca/Costco.com is divided into the following categories:

• Appliances

• Automotive & Tire

• Baby, Kids & Toys

• Computers

• Electronics

• Funeral

• Furniture & Mattresses

• Gift Cards, Tickets & Floral

• Grocery & Household

• Health & Beauty

• Home & Kitchen

• Home Improvement

• Luggage, Handbags & Clothing

• Office Products

• Patio, Lawn & Garden

• Pet Supplies

• Sports & Fitness

Select several products to observe and memorize the details of their packaging well enough that you will be able to recognize them from a distance. These products will become your indicators during your trip to the store.

2) During several trips to the store observe different consumer groups.

I recommend that you make at least two trips to the store – one weekday and one weekend. While at the store use your knowledge of product packaging to observe the behaviour of your fellow shoppers.

Pay particular attention to the following groups as their buying decisions may be the most indicative of the health of the companies you are interested in:

• Multi-generational families – companies who can keep someone for life will have significant repeat business

• Large families (>4 children) – they will select products that give them the most value for their dollar and will habitually purchase them once they have found a brand they like

• Groups who buy in bulk (e.g. Hutterites, church groups, schools) – they may be on a budget but will make large purchases (I once stood in line behind a Hutterite gentleman who had over 100 cans of Carnation hot chocolate mix in his cart. I also saw a high school principal I knew buy two full boxes of bananas for his school breakfast program).

Observations can be made in many different ways. Remember that your goal is not to draw attention to yourself by being creepy. Some examples include:

• Buy something from the cafeteria and watch the checkouts while eating it

• Talk to some friends in the section that carries your product and watch how many people put them in their carts

• Walk around the store while doing your regular shopping and observe the carts of your fellow shoppers

3) Use knowledge gained to make wise investment decisions.

Now that you have an idea of the quantities of your chosen products being purchased you can use that knowledge to make wise investment decisions. If you chose the products because you had already considered the company that made them then these observations can either steer you to buy or confirm the stock is not a wise investment at this time. If you chose the products without knowing what company produces them you can now research that company and determine if they are one you would like to purchase. Either way the observations you have made (and will continue to make) about consumer purchasing behaviour can give you the confidence to stick with these companies during downturns in the market. Seeing with your own eyes that people continue to purchase the products from your company despite economic downturns will be far more valuable in preventing you from panicking and selling prematurely than any numbers the company will report.

Other companies you can use these steps for include:

• The one you work for – every week my company goes through up to 10 boxes of paper and other office supplies. We cannot be the only business keeping our supplier afloat.

• Walmart, Loblaws, etc. – Similar to Costco these companies have stores in every major and minor city resulting in major distribution power.

• Fast food restaurants – before my current job I worked as a supervisor for an A & W restaurant. We went through a significant amount of condiments, tray liners, coffee, and other consumables on a daily basis. Franchises tend to have corporately mandated suppliers and will buy their supplies in bulk. Also, these restaurants have standardized recipes so all you have to do is count the number of patrons to estimate how many of these consumables are being used.

• Toy stores – parents, friends, and other relatives may splurge for birthdays and during the Christmas season.

• Dollar stores – the psychological effect that getting something on sale has on people makes them purchase more. These stores also provide opportunities for tourists (I live near the US-Canada border in Alberta and once saw a couple American ladies buy boxes of Canadian chocolate bars at a local dollar store since they couldn’t get them where they lived).