Costco Wholesale Corp. (COST-NASDAQ, $151.84). Buying on the Capitulation “Sell” Recommendations by Investment Firms.

The Global Large Cap Portfolio has re-established a position in Costco Wholesale. The decision to do so was made after a mid-sized investment house, with a terrible track record in predicting valuations, issued a sell recommendation on Costco using only the spurious rationale that the share valuation had fallen, post Amazon-Whole Foods acquisition announcement. Capitulation selling, in the absence of corroborating evidence, can sometimes represent bargain pricing for longer term holders.

Analysts, few of which, it appears (several through self-reporting) even shop at Costco, have taken the announcement of Amazon’s purchase of Whole Foods to be nothing short of the death-knell for retail. One firm in particular, with limited research coverage outside of mining, oil and gas and commodity resources, could find no other reason for issuing a sell report on the retailer other than the decline in price. In fact, that firm noted that Costco’s fundamentals, margins and new store openings were growing beyond expectations.

This author feels that the Amazon proposal to acquire Whole Foods is far from a sea change in retail. It is less than a foregone conclusion to conclude discerning shoppers will, en masse, permit the staff of Whole Foods to shop on their behalf, package up their purchases and use Amazon as a shipping service. For investment analysts to blithely embrace such a view is to ignore an overwhelming mountain of economist/marketing studies and data, that both suggest and confirm, a clear unwillingness of consumers to trust such purchase decisions to third parties.

The dominant consumer pushback for home delivery of perishable and grocery items; one which likely cannot be overcome by food retailers, is that store staff, charged with fulfilling shopping orders from customers, will work under oversight from retailer management and select the worst seafood, meats, dairy product fruits and vegetables (those that are less than sightly, that are under ripe or that are almost overripe) to fulfill orders; leaving the BEST and freshest stock in the stores for purchase by discerning shoppers. While not all of the purchase order will fulfilled in such a fashion, at least a few items, that would not normally get into the typical consumer basket, will be included. At Whole Foods, whose CEO publicly admitted that the store placed priority of profit over customer service, such a form of shopping would merely represent a continuation of corporate policy.

In food retailing, spoilage is a greater issue than shrinkage. The temptation for a grocery store manager to fill an order list submitted by a customer with day old bread, about to be expired meat, fish, dairy, canned goods with a shorter than average storage life remaining, under ripe and over overripe fruits and vegetables; well, this represents a savvy corporate decision and can earn handsome bonuses for all. The loser is, of course, the customer. Whole Foods has demonstrated, through actions, a profound lack of ethics and a blatant disregard for their customers. In this authors view, Amazon has selected the wrong messenger to convert wary shoppers to the “click-and-pull” purchase experience. Had Amazon purchased a retailer such as Kroger, the concern of some customer drain away from Costco might have been justified.

Whole Foods has a well-known penchant to engage as a profiteer in the retail space and just how many consumers will trust a profiteer to shop on their behalf? Shoppers are economic beings every bit as much as are corporations. Shoppers behave rationally and act in their best interests. Until such time as a retailer can demonstrate, repeatedly and without error, that the store employees are able to overcome management interference with the shopping list and until such time as unmotivated, low wage employees can replicate the purchase of the exact same perishable basket of fresh produce, fresh breads, fresh meats, fresh fish, etc. as a savvy consumer, mail order shopping of perishable groceries will still remain a niche market, at best, for retailers.

Costco, in the meantime, has continued to expand their store footprint steadily. Analysts have also failed to note the currency appreciation of several key markets for Costco. These currency movements represent tailwinds that may persist for several quarters to come. This author may not like some of the tight-fisted policies of Costco, but valuation generally trumps personal grievances. To this author, the recent sell-down, initiated largely by fearful analysts engaged in a “sky-is falling” herd mentality, have unduly pushed the shares. Such groupthink may abate in the coming quarters.

The model portfolio had sold the entire position in Costco some time ago. As holders of the portfolio know, those funds were reinvested quite profitably. The entire weighting in Costco has now been repurchased.