Buying In Bulk Discount Stocks - 3 Ways To Play

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 |  Includes: COST, PSMT, WMT
by: Dividendinvestr

By Renee O'Farrell

Bulk discount stores are a lot like the corporate version of a co-op. By the bulk discounter purchasing in mass quantities, the price of the goods is lowered and the reduced price can be passed forward to the consumer, using in exchange for a membership fee. With the economy in a shambles, many more consumers are looking to save money any way possible - including buying in bulk - which makes investing in these companies a smart move.

The Sam's Club division of Wal-Mart (NYSE:WMT) is perhaps the most famous of these bulk discounters. Sam's Club, which accounted for $53.8 billion of Wal-Mart's sales last year (read about it here) has played a large part in the success of the company. Warren Buffett's Berkshire Hathaway has long been a shareholder in Wal-Mart (see Warren Buffett's top stock picks). Boykin Curry's Eagle Capital Management and Ken Fisher's Fisher Asset Management are also fans of the company. Each owned large positions in Wal-Mart at the end of the fourth quarter of 2011.

Wal-Mart recently traded at $59 a share, which is roughly flat since the beginning of the year. At this price, the company has a forward price to earnings ratio of 11.18. Analysts expect Wal-Mart's earnings to increase by 8.73% a year on average over the next 5 years. The company pays a 2.69% dividend yield on a payout ratio of just under 32%. Overall, I like Wal-Mart as a long position because of the dividend and its long history of growth but I would not recommend investors with a shorter investment time frame invest in the company.

I feel the same way about rival Costco (NASDAQ:COST). It has a $35.85 billion market cap and recently traded at $82.62 a share. Like Wal-Mart, so far this year, Costco is running flat but the similarity ends there. Analysts are expecting the company's earnings to increase by an average of 13.32% a year over the next five years, which is considerably more earnings growth than Wal-Mart). At its current price, Costco is trading at 18.95 times its forward earnings, suggesting that most of that earnings growth will not come until the later half of the next five years. Investors buying into this company have to realize that the highest gains are going to come in 3-5 years or more. In the meantime, Costco pays a 1.16% dividend yield on a 27.56% payout ratio, which could help to offset some lackluster performance, but I say why not wait a year or two before investing in the company. The increase in price will likely be modest based on its expected earnings.

I think some hedge fund managers saw the same thing. In the fourth quarter, several heavy hitters cut their positions in Costco considerably. Steve Cohen's SAC Capital Advisors slashed its stake in the company by 72% while Ray Dalio's Bridgewater Associates reduced its holding by 68%. Other hedge fund managers that cut their stakes in Costco include David Costen Haley, Israel Englander and Tom Russo.

Right now, in this industry, underdog PriceSmart (NASDAQ:PSMT) looks really good to me. It is priced at just over $77 a share and pays a 0.78% dividend yield on a 29.16% payout ratio. The $2.33 billion market cap company has a forward price-to-earnings ratio of 27.34, so a little high, but analysts are expecting the company's earnings to grow at an average rate of 15% a year over the next five years. To date, PriceSmart's share price is up 11.24% and there is nothing to indicate that trend is going to change. Jim Simons' Renaissance Technologies is bullish on the company. The fund initiated a new position in PriceSmart during the fourth quarter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.