Follow Buffett’s Lead: The Next Wal-Mart

By Travis Johnson, Stock Gumshoe, April 7, 2009

OK, so let me just warn you up front: The latest ad from Nancy Zambell for her new Buried Treasure under $10 newsletter has a lot of, well, hooey in it.

But really, doesn’t that just make it more fun?

Here’s how the hype begins:

Buffett has sunk $2 billion into the next Wal-Mart
Here’s why you should follow his lead ….
Imagine being able to buy a share of Wal-Mart for five cents.

That “buy Wal-Mart for five cents” (or sometimes two cents, or one cent) argument is one that’s been made by many newsletters — it’s usually put out there as an argument in support of small cap stocks with understandable and profitable businesses, since that’s what Wal-Mart was back in 1972 when it went “on the big board” (the five cents is split-adjusted — and they were public for a couple years before that, but not on the NYSE). It turns out that Wal-Mart had a revolutionary management strategy and focus, but not many people recognized that back then, when they had fewer than 100 stores (versus something like 7,000 now). I know, for example, that the Motley Fool has used this Wal-Mart analogy in their ads for Hidden Gems for many years (though they weren’t around to pick Wal-mart back in the 1970s, either).

Of course, no one goes out and checks to see how many other retailers with a market cap of $50 million or so (that’s above where Wal-Mart started trading in the early 1970s) failed completely or never grew much at all — it’s awfully important to pick the right small company that will grow into a world beater if you want something incredible like a 50,000% return.

And if you are convinced that you’ve bought the “next Wal-Mart,” you’ve also got to stick stubbornly to that company — Wal-Mart spent its first few years getting clobbered in the stock market, you could have easily gotten rid of your shares with a 20, 30, 50, even 70% stop loss during those first couple years, depending on exactly when you bought shares, and you could easily have held them for five years with virtually no gain at all. It was a tiny stock, and a volatile one.

Of course, not long after that the company really started its explosive growth, and launched the ridiculous stock chart that we can now look back on with regretful lust (why didn’t I buy that? Maybe because you thought, like many others, that it was a silly rural retailer that wouldn’t amount to much and would be crushed by the retail establishment).

And it would have been almost as hard to hold it for 30 years — how many folks can hold on to a stock that has gone up 300% and hold out for that 1,000% gain, or 5,000% or 50,000%, even as the shares dip and dive along the way?

The Gumshoe, of course, loaded up with thousands of shares of Wal-Mart back in 1970 — and that’s why I’m typing to you today from my ergonomically correct platinum throne in Gumshoe Castle.

Oh, wait, that was a dream.

No, I wasn’t even old enough to have a Social Security card in 1970, and I thought Wal-Mart was dumb when I first heard of it probably a decade later — it sure would have been nice, though, to be so prescient. I would have spent a few more days at the beach last week, at the very least.

But anyway … we had a point here, yes?

We’ll get there. Zambell thinks she’s got the “next Wal-Mart” for us, but (and this is where the “hooey” comes in) … it turns out that it’s nowhere near being a small cap stock, and therefore it’s almost impossible for this teased stock to have even a fraction of the kind of run Wal-Mart has had (a few cents to fifty dollars a share). So temper your enthusiasm, but we’ll go into a few details in just a moment about what this stock really is.

This doesn’t have much to do with Zambell’s point, but FYI: Warren Buffett is a holder of Wal-Mart shares, too, though it’s a pretty recent addition to his portfolio — and if the next 1970s-era Wal-Mart comes along, he’s probably not going to be the one who finds it for us. As of the last 13F filing, Berkshire Hathaway owns about 20 million shares of Wal-Mart (a bit over a billion dollars worth, if you don’t want to do the math), certainly enough for Buffett to pay attention, but probably not quite enough to crack his top ten holdings.

Buffett doesn’t generally spend his brain power on small companies anymore, he’s managing a massive portfolio and has to make huge investments to move the needle for Berkshire Hathaway these days … buying shares of a $100 million company would probably be as much a waste of his time and talent as picking up a quarter off the sidewalk (he might be happy to buy a whole company of that size, or preferably larger, if it wasn’t yet public — but he’d be unlikely to buy a portion of it on the stock market). And of course, even if Buffett is buying something there’s no particular guarantee that he’ll be right, or timely — I’d hate to bet against him, but he does make mistakes (US Airways and ConocoPhillips are two big ones that come to mind). Fewer mistakes than I do, of course, but mistakes nonetheless.

But we were talking about Nancy Zambell — she uses Buffett’s name to try to sell her Buried Treasure under $10 newsletter, but what she’s really offering is a great “recession stock” — an investment that should perform well during these weak economic times.

So what, among these recession stocks, is her “next Wal-Mart?”

The clues:

“But another new grocery chain, as unknown as Wal-Mart was in 1972, has that Sam Walton touch. And they’ve nailed the margin issues every bit as well as Wal-Mart.

“The more I dug into this story, the more fascinated I became. And then I found something that just thrilled me. Warren Buffett has just sunk $2 billion into this company….

“I’ve already hinted that Sam’s magic touch, abandoned by Wal-Mart, has resurfaced at this small grocery chain.

“Here’s the idea: a small Main Street shop that hand-delivers your groceries whenever you need them.

“Today, grocery shopping online and supply chain technology makes the process seamless, speedy and astoundingly cheap. Yes cheap even compared to the trek to a cavernous megamart.

“So here’s the Big Idea. Local stores, selling basics at cut-rate prices and delivering them to your doorstep within hours of receiving your online order. Californians are already liking the idea: 150 stores are set to open there in the next year….

“Can this upstart grab market share with this close-to-the-customer strategy? It has already done so in the Czech Republic, Japan, South Korea, Ireland and the U.K. Right now, a joint venture in China is just getting off the ground.

“Buying this grocer today is like buying Wal-mart when it was a nickel a share.”

So who is this? Despite the claim that this is “like buying Wal-Mart when it was a nickel a share,” this teased company has to be …

The third largest retailer in the world, Tesco (TSCO in London, TSCDY for the 1:3 ADR on the pink sheets).

In case you’re curious about this one, do be careful — it is NOT the Tesco that’s listed at TESO on the Nasdaq (that’s an oil service company). The TSCDY pink sheets shares each represent three shares trading in London, so today’s closing London price of about 331 pence would equal $4.88, meaning a fair price for the US ADR of $14.64 (4.88 times three). The last trade of the ADR was at $14.69, so apparently there’s enough volume for the pricing to be at least close to fair.

Tesco is a huge company, and arguably a growth story — it’s far smaller than Wal-Mart so far, but so is everyone else … and people seem to think Tesco will be overtaking Carrefour to become the second largest retailer within the next several years. They started as a small UK grocery company, and now run a variety of different kinds of shops, mostly grocery-based, around the world — including hypermarkets that rival (and sometimes dwarf) the Wal-Mart supercenters in size and scope.

What Nancy Zambell is excited about, apparently, is their move into the US — a move that just began very recently. And she is right, Tesco is coming in not with supercenters or massive Wal-Mart killers, it’s coming in with what are essentially souped up convenience stores that they call “neighborhood markets.” They’re building up a chain of small groceries called “Fresh & Easy” in California and a couple other Western states, selling private label groceries, produce, and their own brands of prepared foods. The “delivery to your home” bit is reading a little more into it, but Tesco does have probably the world’s most successful online grocery business, so it’s feasible that it might try that in the US, too, at some point.

What is truly disingenuous is trying to sell someone on Tesco based on the argument that their tiny US operation is revolutionary and will drive them to massive growth — that’s sort of like saying you should buy Wal-mart because they own a 100-store supermarket chain in Brazil (they do, by the way, the chain is called Bompreco and they bought it a few years ago).

So — it’s definitely not nearly as “unknown as Wal-Mart was,” unless you never pay attention to non-US companies. This is a massive retail operation with muscle that’s comparable to Wal-Mart’s in many ways and in many places. They operate about 4,000 stores around the world and had sales of about $70 billion in 2008, so even though the tiny US operation of just 100 or so smaller Fresh & Easy shops may hold great promise (that’s up for argument, too), it’s going to be a long time before they have any kind of impact on the company.

The company’s largest business, by far, is their grocery store chain in the UK that accounts for close to three quarters of sales — but their international business is where the growth focus lies, and that certainly includes both the US and China, in addition to other markets in Europe and Asia where they already have a good and growing presence — mostly with large supermarkets and hypermarkets, not with local grocery chains like Fresh & Easy.

There was an article that called Tesco “Wal-Mart’s worst nightmare,” all about their nascent foray into the US market, in Business Week back in December. They’ve been rolling out this Fresh & Easy format for a year or so, and while they still seem to be backing the concept it hasn’t exactly been setting the world on fire so far — here’s one article about some of the struggles they had in getting a foothold in California (from last year), and a more recent sober article about their expansion during this recession from Progressive Grocer.

Will Tesco succeed in this still-young (less than 18 months since they opened their first store) effort to colonize the US with their neighborhood markets? I have no idea — it’s obviously tough to launch a new brand in what are some of the absolutely most economically devastated cities in the country right now, and I’m sure it hasn’t been easy so far, but they are certainly a successful and profitable company with the resources to keep pushing. They’re going up against massive competition in all of these places, not just Wal-Mart but grocery chains like Safeway and similarly-sized stores like Trader Joe’s that are well established in many of these same communities. And it wouldn’t be the first time a foreign company failed at establishing a retail presence in a competitive market — just ask Wal-mart how they enjoyed competing in Germany or South Korea (they sold their stores in both countries a few years back, after losing buckets of money).

And keep in mind that while growth for Tesco lies overseas, most of the profits still come from home — Tesco has a massive market share in all kinds of retailing in the UK, so if the economy there collapses even more we might expect to see some margin compression as consumers pull back, which might possible hamper Tesco’s willingness to continue investing heavily in other markets … just conjecture, but a reminder that as the UK economy goes, so, probably, goes Tesco.

Other stuff to consider? Tesco has paid a growing dividend — it was 10.9 pence for 2008, which translates to a trailing yield of better than 3% at the current exchange rate (not sure whether that dividend is taxed by the UK or not, or, of course, whether it will continue into the future) — that’s a significantly higher yield than Wal-Mart, but not particularly rich in this current environment. They trade at about the same price/sales ratio as Wal-Mart (0.5), but the Behemoth from Bentonville trades at a substantial premium to Tesco in terms of PE ratio (15 vs. 12) and Price/Cash flow ratios (10 vs. 6, according to Morningstar), as you might expect from the biggest and the best. In terms of recent performance, Tesco has had a tough couple years but has still seen its share price just about double over the last six years or so — Wal-Mart’s stock has tread water for much of that time, but in doing so has, at least, dramatically outperformed almost all other large cap stocks during this bear market.

Tesco is an interesting company, and an aggressive but patient grower, so it may be worth a look if you’re interested in a global retailer other than Wal-Mart — and Berkshire Hathaway does have a pretty substantial share of the company, though it’s worth far less than $2 billion now thanks to a declining share price and the falling British Pound (not sure what Buffett paid for it, but he built the position over the past couple years and it has been unchanged in recent quarters at about 227 million shares). Actually, if you do the math you’ll probably find that Warren Buffett’s holdings in Wal-Mart are probably quite similar in size to his holdings in Tesco right now, something in the neighborhood of a billion bucks.

Nicholas Vardy, another newsletter editor, mentioned Tesco in a SeekingAlpha contribution back when they launched their US stores, but it hasn’t been a high profile newsletter pick as far as I’ve noticed.

So … wanna pick up some shares of Tesco? Share your opinion about Nancy Zambell’s newsletter? Come up with a stock for us that you think has more of a chance to go from a nickel to $50 bucks in the decades ahead? Feel free to opine below …

… but even as I think Tesco is an interesting company, I can promise this: If we look back in 30 years and find that this opportunity in Tesco shares was like “buying Wal-Mart for five cents,” I’ll eat my hat (and at the rate my hairline is moving right now, it will be a hat that I’ll sorely miss).

Full disclosure: As of this writing I own shares of Berkshire Hathaway. I don’t own any other company mentioned above, though I’d pay attention if Trader Joe’s ever went public. I won’t trade in any company mentioned above for at least three days.

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25 Comments on "Follow Buffett’s Lead: The Next Wal-Mart"

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Mathew
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Mathew
April 7, 2009 11:41 am

Just for my 2 cents, if I’m bottom fishing for value based on the assumption that things will improve globally, I would rather put my 5 bucks into a share of TCK, Teck Cominco Limited, for what it may be worth~ Cheers!

ponce
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ponce
April 7, 2009 11:58 am

Yeah! Observe caution in investing on a come. Not all that glitter is gold. Look at Wal-Mart De Mexico. It has not done much.

Robert
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Robert
April 7, 2009 12:13 pm

Wal-Mart already has a string of small grocery stores they call “Neighborhood Markets”. That puts them at an advantage, being a well-recognized and trusted name. They could quickly expand that string of stores if faced with a viable competition. One of Wal-Mart’s biggest criticisms is the huge size of SuperStores. Many seniors do not want to do that much walking to do their shopping. Full disclosure–I own Wal-Mart shares and knew Sam Walton when he had one store in my hometown of
Bentonville, AR.

dumbcontractor
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dumbcontractor
April 7, 2009 1:04 pm

Travis,
Have you done any research into geothermal energy production and more specifically Raser Technology?

In the field of “alternative energy” being comprised of wind, solar and geothermal, my unsophisticated research leads me to believe that geothermal is the most reliable, easiest to tap and produce as well as the most economical and yet we see very little discussion about it in the press or on any discussion boards….just wonder what are your thoughts.

Disclosure: I own stock in Raser (RZ) and US Geothermal (HTM).

Brent Brown
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Brent Brown
April 7, 2009 1:58 pm

After reading the stockgumshoe report about Arena Pharma, I have been watching, thank goodness not buying the stock. The time frame for all of us to be millionaires is upon us, and the stock has gone frome 6 to less than 3. Who was the person that recommended that stock? I am pretty sure he made a few bucks at the expense of his readers. Thanks for your service. It has been more than interesting reading your articles

Katie Catt
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Katie Catt
April 7, 2009 7:13 pm

I think I’d rather take a chance on the Brazilian chain Companhia Brasileira de Distribuica (CBD), although Wal-Mart s now moving into Brazil. CBD owns grocery stores that cater to the high end as well as stores aimed at the mass market

max thweatt
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April 8, 2009 9:12 am

what’s your take on the latest push by these guys regarding the african energy play.

max thweatt
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April 8, 2009 9:14 am

your thoughts regarding the get rich energy play in africa currently being pushed?

Ian Davenport
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Ian Davenport
April 8, 2009 12:51 pm

as a UK reader i find it fascinating to hear of Tesco being referred to in this way – here we are under the impression Tesco is already the next Walmart – many towns are referred to as “Tesco towns” as Tesco has more than 50% of the total sales in the town (food and non food) – indeed nationally Tesco makes nearly 30% of UK food sales.
the general view is that they are reaching saturation, hence their move into UK banking (!) and overseas expansion.
Disclosure, my wife has been a Tesco shareholder for many years

Sharon Robertson
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Sharon Robertson
April 8, 2009 5:20 pm

Wal-Mart has also opened “Marketside” markets in the greater Phoenix area, which are meant to directly compete with F&E; however, F&E’s prices are considerably lower than Marketside’s, and the produce and meats are of a higher quality than Marketside’s. Friends are betting that Marketside doesn’t last a year, despite having Wal-Mart behind it.

Gary Wheat
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Gary Wheat
April 9, 2009 11:13 am

Another smaller store concept that is growing is Sprouts. The Arizona based company has expanded from California and Arizona into Texas and Colorado. Same concept as Whole Foods, but smaller and better prices on many identical products. The smaller store makes it much easier to shop than Whole Foods.

spreadtrader
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spreadtrader
August 21, 2010 8:44 am

Yes, but you must admit……..the entertainment value is better than anything on TV.

Indeed, some "wise" investors even think that this is financial "news"…………lol.

David
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David
November 11, 2010 12:11 pm

I was thinking about investing in Tesco but not sure about it now because i read that they're fresh and Easy stores are a failure in the US. Most or all British retailers fail in America so I guess this is one of them.

David
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David
November 11, 2010 12:19 pm

I was thinking about investing in Tesco but not sure about it now because i read that their fresh and Easy stores are a failure in the US. Most or all British retailers fail in America so I guess this is one of them.

Sorry, I had to post again to fix a grammar mistake.

Gravity Switch
Admin
11
April 7, 2009 1:00 pm

Interestingly, Wal-Mart De Mexico has tracked just about even with Tesco over the last three years (both have been much worse than big poppa Wal-Mart over that time)

Gene
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Gene
May 18, 2009 1:05 pm

Just depends sometimes on how strong you feel about the “glitter” and how long you hold it. Personally I bought into WalMartdeMexico back when Walmart first bought into the Cifra company in Mexico and began this venture and have been very happy. Even with the price fall this past year (same as many others with the market) I am up over 400 percent on my investment at this time and still holding because I believe it will continue to recover.

Gravity Switch
Admin
11
April 7, 2009 1:16 pm
Ah, I had forgotten about those! I worked for a food industry association ten years ago when Wal-Mart launched these neighborhood markets, they panicked all the other grocery stores but still have only about 130 of them open, so I guess it’s not a particular focus at the moment — I haven’t been following the story very closely. If those numbers are still correct, there are about as many Wal-Mart Neighborhood Markets as there are Fresh & Easys right now. Just FYI, Wal-Mart’s “Neighborhood Market” is still pretty big at around 40,000 square feet (about the size of an average… Read more »
Mark
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Mark
April 7, 2009 7:41 pm

Just because Wal-Mart calls their grocery stores “neighborhood markets” this does not mean that they are anything of the sort. These are full-size, traditional grocery stores which bear the burden of Wal-Mart’s reputation as high-volume purveyors of low-quality merchandise. The quality-conscious consumers F&E are aiming at wouldn’t be caught dead in any building with a Wal-Mart sign on it. Only Trader Joe’s is offering anything like F&E on a semi-national level, and unfortunately TJ’s is owned by a privately-held German corporation, so we won’t have the opportunity to invest in it.

Gravity Switch
Admin
11
April 7, 2009 1:17 pm

Geothermal stocks come up pretty frequently in this space — most recently this overview:

http://www.stockgumshoe.com/2009/03/limitless-profit-from-sonoma-grizzly-power.html

And this article about Raser:

http://www.stockgumshoe.com/2009/03/a-triple-in-steam-megashift-profits.html

Gravity Switch
Admin
11
April 7, 2009 8:29 pm
Both Phase 1 Investor from Stansberry and Ian Cooper’s newsletter (forget the name for the moment) predicted a great future for Arena … it will be curious to see whether anything about the next Phase III trial changes anyone’s minds — the bigger fear going into the release of trial results was probably safety, which seems to have been fine, but the bigger fear coming out was efficacy, which was weaker than most expected — if it doesn’t work well enough, the fact that it’s safe is of little solace. I bet they’re glad they raised their desperately needed short-term… Read more »
Gravity Switch
Admin
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April 7, 2009 8:32 pm

Interesting, I hadn’t ever heard of them — at a quick glance, they look a little bit like a Brazilian Tesco in terms of their scope, lots of different kinds of store formats for food and other retail.

marilyn Milam
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marilyn Milam
April 7, 2009 9:06 pm

Nothing to do with the above. Re Your hairline: take Choline and Inositol, usually found in the same capsule or pill from your health food store. My boyfriend confirms it reduces hair loss VERY significaantly. No more hair in the shower!.

Marilyn

Gene
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Gene
May 18, 2009 1:13 pm

I also recommend a look at grocery company in Mexico… SORIANA. There company is listed there as SORIANAB.MX, in the U.S. it is ADR listed as ONZBF.PK . This company’s operation and financials resembles early WalMart days even though there company is not so young they are doing a good job. I am a holder and look for stock price improvement as markets continue to recover over time.

ponce
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ponce
April 7, 2009 11:49 pm

I am sold on the quality and selection of products at Trader Joe’s. I am their regular customer since the 70s. NO, could not invest as you said it is privately owned. So F&E might be a blessing for me. I also go to Whole Food Market.

Deborah
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Deborah
August 20, 2010 5:29 am

my thought is Hogash! It'll be years before that comes to fruition. If you want to be in on the action buy RIG symbol.They lease rigs so for now you'll be gettings an undervalued stock cheap nd be there if/when this ever happens.

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