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.

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“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 th