It’s common for investors to be interested in the companies Warren Buffett buys and sells for the Berkshire Hathaway (BRK.A 0.14%) (BRK.B 0.19%) stock portfolio. After all, Buffett is one of the greatest investors of all time. It makes sense that investors would want to know what moves he’s making.
While Buffett’s Berkshire portfolio may be of interest, simply mimicking his trades should not be an investment strategy. He has a significantly different portfolio than most investors, so unless he publicly comments on a trade decision, investors will never know the exact reasons for a buy or sell.
In 2020, Buffett sold out of his entire Costco Wholesale (COST -0.25%) position. Whatever his reasons were at the time, I think Costco is a company investors should own in 2023. Who knows? Maybe Buffett would agree.
Costco’s unique business model
One factor that leads to Costco’s success is that it remains a low-cost provider of bulk goods. This has been especially helpful over the past year as rising inflation has squeezed the wallets of many consumers. What’s worth paying attention to as investors is the structure of its business that allows it to keep costs low for customers while remaining consistently profitable.
Costco focuses on low prices and a limited selection of a wide range of products to drive quick turnover of its inventory. For example, it sells fewer than 4,000 unique items as compared with the 30,000 a typical supermarket might carry. These items are also limited to the ones that will sell the fastest. Additionally, the no-frills warehouse model, with products displayed on pallets, reduces the number of employees needed to operate its locations.
Memberships help drive profitability
Perhaps the most important factor driving Costco’s success is its memberships. As of the quarter ended November 2022, it had nearly 67 million paid members and brought in $1 billion in membership fees. These memberships not only drive customers to the stores but also bring in high-margin revenue that is very important to Costco’s overall profitability.
As this chart shows, despite a lower gross margin than two larger supermarket chains, Costco’s business model allows it to keep its expenses under control and turn more revenue into profit than its largest competitors. This is great news for shareholders as it has allowed Costco to pay a dividend and return value to shareholders through stock repurchases.
Recession resistant, if not recession proof
Costco’s cost advantages help it navigate tough economic conditions. Over the past three years, as the business faced a global pandemic and then increased inflation and worsening conditions for price-sensitive shoppers, it held its own just fine. Net sales increased 8% year over year while operating income, net income, and earnings per share all grew 3%.
Looking back further, even during the global financial crisis, Costco memberships continued to grow. From 2008 to 2009, its Gold Star memberships increased 6% and then another 5% the year after. Yes, net sales and net income saw a dip in 2009, but people kept joining and that was to Costco’s benefit as the economy recovered in the ensuing years.
While Costco stock isn’t cheap, the recent bear market has brought its valuation back to where it was three years ago. Over that time frame, the company has grown revenue 46% and net income 56%. Investors can expect to pay up for a quality business, and Costco has competitive advantages that make paying that premium worth it for investors.
Jeff Santoro has positions in Berkshire Hathaway and Costco Wholesale. The Motley Fool has positions in and recommends Berkshire Hathaway and Costco Wholesale. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.