Retail Madness: Dump Wal-Mart, Buy Target and Costco

 |  Includes: COST, TGT, WMT
by: Georges Yared

An old client of mine has been a Wal-Mart (NYSE:WMT) shareholder for years and years. He has made a fortune with the stock and, of course, is now falling victim to the usual thing that happens to people when they have made a fortune with a stock: he is emotionally attached to it. That's one of the worst characteristics, though sometimes it's quite unavoidable.

The stock has provided wealth building and after a while the afflicted investor gets used to the beautiful annual reports with the colorful pictures, showing happy customers and of course, the bribed happy employees. He asked for my professional guidance on the stock. He held his breath--but he listened. I told him to sell every share he has, long-term capital gains tax be damned--pay them happily and get on with a couple of winners.

He wants to keep the assets in the retail space as he has felt lucky with that sector. For that I do not blame him. I explained to him that Wal-Mart has a $200 billion market capitalization right now. He bought in when the market cap was only $40 billion, thus the 5 bagger. The next two-larger cap names with 5 bagger potential are Target Corp. (NYSE:TGT) and Costco (NASDAQ:COST). Both are killing Wal-Mart in different ways: Costco is beating Wal-Mart's Sam's Club consistently, month-in and month-out. Target is beating the traditional Wal-Mart stores with a fresh look, higher quality fashion selections and many other visceral things. Both concepts have room to double-to-triple their store base and the existing units beat Wal-Mart in the monthly critical same store sales metrics.

Wal-Mart has issues unique to its size and clumsy execution. Why stick with this stock when Costco and Target offer greater share appreciation over the next 2-5 years. One day, Target and Costco will face the same growth issues as Wal-Mart...but many years from now...

WMT/TGT/COST 1-yr comparison chart