McDonald's, Costco: Long-Term Picks With Immediate Entry Points

When economies suffer, investors look to  “consumer staples,” i.e. companies that are a fundamental part of a consumer’s regular expenditures. This includes energy, food, and the like. When money tightens, everyone starts to spend less and spend more carefully. So what’s left for us, as investors, to do is to find out what companies can benefit from consumers spending less.

I’ve come to two different picks in different industries for you to look at. This is a preliminary look - it’s wise not to take my picks as reasons to go call your brokers. Instead, as always, let this post serve as your starting point to discovering good companies with solid earnings and good prices that you personally like.

My first pick is our good old McDonald’s Corporation (MCD). Tight on money? Nothing like a dollar menu sandwich for you to save on your wallet. Where else can you get a full size fattening lunch meal including fries and a Diet Coke for under $5? Sure enough, you can assume McDonald’s is somewhat “protected” from the slumping economy. For some people, it even makes more economic sense to eat here instead of cooking your own food!

MCD is currently selling for $55/share. The stock has been outperforming the S&P - down 6% YTD (versus S&P’s -38%), down 1.3% over the last year (versus S&P’s -40%) and they are down a scary 12% over the last month. But protection is prevalent when you see their one month decline compared against the S&P’s 25% one month decline - ouch! So they are still selling at a discount despite being up against the market. Their latest quarter saw comparable sales increase 7% (see earnings call transcript). Yes - you read that right - there are still companies that are able to make money in this market. McDonald’s does not resemble the lending institutions that have plastered the front cover. Operating income was up 20% this last quarter. And buying now gives you a fat 3.6% yield. They actually raised their dividend by 1/3 to $2/share. A little note - any company that raises their dividend in the midst of all this turmoil might very well be a winner.

The second pick is in the wholesale retail category: Costco (COST). Costco is the one place where consumers can continue to load up on groceries, supplies, clothes, medications, and anything else all at discount prices. You can buy a five gallon bottle of milk here - which is how wholesalers like Costco and BJ’s (BJ) and Sam’s Club make their money. They don’t even give you plastic bags when you leave the store - also a major savings on costs. Buying in bulk will save the consumer money.

Their stock currently at $53 per share is similar to MCD’s in outperforming the S&P 500. Down 23% YTD (vs -38%), -20% 1yr (vs -40%), and -16% over the last month (vs -25%). Costco’s swings indicate it’s a bit less protected, but protected nonetheless. No dividend increases here but you are rewarded with a small 1.2% yield. Revenue was up 12% to $72 billion last year, with quarterly profit up 7%. Analysts have very articulately stated that Costco's combination of superior merchandising, compelling prices and gas sales have driven industry-leading traffic trends with little risk to sales in the near-term.

The macro risks to these picks are if the economy were to drastically pick up. To be clear, if the economy picks up, these companies still make substantial amounts of money, but their stock prices won’t reflect that as investors generally pull money out of these consumer staples into higher growth companies during economic booms. But by the looks of it, we’re not out of the woods anytime soon, so these are great long-term picks with immediate entry points.

Disclosure: none

Comments

[Gene Carter:]

Costco's problem unfortunately is in the training of their staff!
When you can't find someone to assist you in their high-end
electronic department and their in the low-end areas of the store
this is truly questionable. Why? In addition, how nice it would be when
your check out with you multiple $100..charges how nice it would
be if the clerk would say Thanks, or Thank you for shopping with
us or "Costco."
The Department Stores screwed up taking employees off commissions
and put them on straight salary...no one gave a hoot to go out of
their way to help the customers and their sales dropped radically.

2008 Oct 23 11:13 AM

[wotfel:]

costco's emps are trained in services such as tire installation,pharmacy,... prep,bakery,meat/fish....in other words,areas that require those skills. If you're looking for a tv or computer or a can of corn you do your own homework before you go to costco. If you want "expertise" on electronics then go to best buy or circuit city and pay more; or better yet go to circuit city,pick their brains,then go to costco and buy it. as a long time costco member my experiences have been wonderful....the emp's are kind and as helpful as they can be.

2008 Oct 23 05:08 PM

[Donald Bruno:]

I don't know where some folks are shopping but my buying experience has always been excellent.....staff is always pleasant,helpful and I get a thank you at the check out every time. Regarding major electronic purchases, I do my homework before I buy. One other thing, you just can't beat their return policy....beats them all with not a hassle. It blows away the other guys and I shop at BJ's to for convenience .

2008 Oct 26 09:27 AM