The Death of Wal-Mart

The Real Cash Kings Changing the
Face of Retail

For decades, American consumers were on an all-out shopping spree, fueling massive growth in the retail sector.

But now that run is over.

The recession forced the nation's biggest retailers, like Macy's and J.C. Penney, to shutter up stores and halt their plans for expansion. And many others, like Circuit City and Linens n' Things, declared bankruptcy.

This news may sound grim... but it doesn't mean Americans have completely stopped spending. In fact, handful of retailers are actually actually grew revenues during this difficult retail environment.

When most people think of recession-proof stocks, retail giant Wal-Mart is usually the first that comes to mind. It's definitely a favorite of the financial media. Kiplinger's and Forbes both point out Wal-Mart's ability to hand investors steady gains throughout deep recessions.

But be warned! Wal-Mart is NOT the best stock you can buy right now.

That's because it's one of the most widely held stocks in the world. It would have to pack on another $200 billion in market cap to double your investment -- a monumental feat, to be sure.

But imagine if you could invest in two businesses very similar to Wal-Mart -- that attract more customers in tough economic times... That crank out cash no matter how bad things get... And that have market caps that are just a fraction of Wal-Mart's...

One is a brick-and-mortar competitor... the other is an e-commerce business that Fast Company calls "The New Wal-Mart."

These businesses both also have a little-known edge...

The secret to finding winners

Here's a hint: This "edge" is the same advantage that's allowed investors to make boatloads on Nike and Apple, two of America's most phenomenal growth stories.

In a word, it's leadership.

You see, guys like Phil Knight and Steve Jobs (not to mention the late Sam Walton) are the kind of focused, aggressive CEOs who can make shareholders rich.

That is, if you can spot them when the time is right. (It's not hard to do, but you have to know what you're looking for.)

Unfortunately, the market meltdown and recent corporate scandals have soured many investors on the idea of investing in old-fashioned values like leadership.

But that's good news for investors like us. Because while the rest of the investing world is ignoring these two rock-solid companies -- we can snap up shares on the cheap!

So let's dive in and find out what makes these companies so special. And why David and Tom Gardner -- co-founders of The Motley Fool and co-advisors of the Motley Fool Stock Advisor investment newsletter -- believe these are "core stocks" -- stocks they believe are essential, long-term investments that should make up the bedrock of your portfolio.

Put customers first and success will follow

That's what drives the CEO of our first company -- and as you'll realize, it's what has its stock price set to soar. With bulldog tenacity, he keeps prices low - making sure his customers come back time after time.

He's so focused on creating bargains, he never allows markups to exceed 15% on any product -- pressuring suppliers to sell for cheap. It's not easy, but "that's why they call it work," he says.

Call it what you will, but it almost guarantees healthy cash generation and consistent growth! In just 28 years it's become the sixth-largest retailer in the U.S.

In fact, this company brought in $85 billion in sales -- in the past 12 months alone!

These kinds of results led to a No.1 "Specialty Retailer" ranking in Fortune magazine each of the last three years. Now, in 2011, it's the "29th most admired company in the world."

You're probably familiar with this company and maybe even its CEO. You may even be among his stores' 62.6 million members. But you might not realize just how big the stock's upside is this very moment.

"The Best Bargain Is the CEO Himself"

That's how Smart Money described the founder and executive, whose base salary is just $350,000. Even with his $190,000 cash bonus last year, his take-home pay is shockingly low. Especially when you consider the billions of dollars in bonuses bankers bring home.

But that's just how much Jim Sinegal cares about seeing his business -- and its investors - flourish.

Here at The Motley Fool we've crowned him "Most Foolish CEO." Frankly, we've long considered Sinegal's Costco Wholesale [Nasdaq: COST] one of the best-run companies around. Its stock hasn't always been cheap, but now that the market is at its lowest levels in almost a decade, Costco's shares are as much of a bargain as the stuff it sells.

And what Costco sells is big value. Each of the club warehouse retailer's 583 no-frills stores is as big as two and a half football fields with the end zones -- enabling each location to carry about 4,000 items. Many of those are in bulk. So if you need a 48-pack of toilet paper or 15 pounds of rib eye, Costco has you covered. Its wide variety of merchandise includes laundry detergent, tires, diamond rings, electronics, and tubs of trail mix big enough to sustain a Boy Scout camp for a week.

Sinegal keeps shelves stocked with big items carrying small price tags. Though this limits the profit he can make off merchandise, his primary focus is providing Costco's members with great value. And the company keeps things interesting for them by constantly stocking the shelves with new items, a concept Sinegal calls the "treasure hunt."

More than 62.6 million people in 34 million households belong to Costco. And its membership base is a big part of its success. About 75% of Costco's operating income comes from the $50 annual household membership fee, which allows members to shop at any of Costco's stores or on its website.

And customers keep coming back for more. The renewal rate for membership approaches 90%, no doubt thanks to the company's refusal to substantially mark up merchandise. Costco is working on expanding its membership base and hopes to open hundreds more warehouses -- many in international markets, where value shoppers abound.

For some companies, new stores put a dent in the bottom line. Not so with Costco. With almost no exceptions, every store Sinegal and company open is immediately profitable. And each has a track record of becoming more profitable every year of operation. Take a look...

How is this possible?

Costco also has an exceptional cash conversion cycle. That's a little formula that measures, in days, how quickly a company can buy inventory, get it on the shelves, and sell it, thus converting it to cash. Costco turns over its entire inventory 11 times a year (roughly once a month!) -- allowing it to sell merchandise even before it has to pay its suppliers for it.

This enables the company to buy some of its inventory on the vendors' payment terms instead of using its working capital. Costco's outstanding cash conversion cycle has run one to three days over the past few years. By comparison, a more traditional retailer like Macy's usually takes at least 70 days to convert its inventory to cash.

This business model produces significant free cash flow -- about $1.7 billion during fiscal 2010. Costco also has a strong balance sheet, with $6.2 billion in cash and only $1.2 billion in debt.

The recent market slide-off took Costco's typically expensive price down to a level lower than we've seen in years. Even though it's now trading around $77 a share, some scenarios show the stock climbing as high as $124 a share. Meaning investors who snap up shares now will be greatly rewarded.

No matter how we run the numbers, now is time to make a Costco run!

Why stop there? It's a buyer's market!

Costco offers you a great chance to get in early and earn some remarkable returns. But today's market is handing us other incredible bargains.

Like one more bargain basement stock you'll find just ahead...

The New Wal-Mart

Cash in on THE ONE company profiting from the death of the mall

You know as well as I do that malls are obsolete... as relevant and useful today as telegraphs and buggy whips...

Once the de facto site for Christmas shopping... the hangout spot for high-school kids... where you'd buy your sweetheart an engagement ring -- local malls are quickly being "reduced to largely vacant shells," according to The Wall Street Journal.

The iconic American department stores anchoring the mall -- names like Macy's, J.C. Penney, and Sears -- have also lost favor with shoppers and are on the brink of ruin. Even their debt is classified as "junk."

What's forcing these malls to board up?

It's simple: the ease and speed of Internet shopping.

And the clear leader of online retail spearheading this trend is Amazon.com [Nasdaq: AMZN].

As with Costco, Amazon's strength begins with its innovative, visionary leader -- CEO Jeff Bezos -- who is focused on making smart and profitable long-term investments. As he told The New York Times, "You can't do big, clean-sheet invention unless you are willing to invest for long periods of time."

One example of this innovation is the Kindle. This revolutionary tool makes it possible to cheaply and wirelessly download books in seconds. Thanks to Amazon's current relationships with publishers, it's quickly become the dominant e-book retailer.

But Amazon's plans don't end there...

Amazon is in the process of setting up a digital store where you can purchase anything you want to read with a click of your mouse or a few cell phone digits, and have the material in seconds on whichever device you want.

Amazon has also begun partnering with top universities. Recently, incoming freshmen at Princeton used Kindles to read textbooks -- shaving off about one-third of the cost, according to the National Association of College Stores.

What's more, BusinessWeek reports that Amazon could soon market "science textbooks that update according to new discoveries, as well as classics that feature Internet links to historical notes and literary criticism."

Profiting from "The King of E-Tail"...

Although it's a familiar name, Amazon is a smart choice for your money because analysts are utterly incapable of predicting revolutionary breakthroughs like the Kindle and how they'll play out over the long term. This means they never accurately estimate future growth.

This is exacerbated by the fact that Amazon doesn't cater to Wall Street analysts like other large companies do. In fact, BusinessWeek referred to Amazon analysis as "Internet-age Kremlinology." Instead of open access, analysts "have to rely on [their] own ingenuity," as a Bernstein Research analyst put it...

And they consistently fall short.

What's more, Amazon isn't just a bookseller... it sells everything from music to DVDs, from furniture to cooking devices and beyond. Customers review items, serving as free testimonials for shoppers on the fence.

One thing's for certain: As malls continue to disappear, Amazon will grow more prominent and will likely compound shareholders' investment over that time period.

And if you think you're too late on this stock -- you're mistaken.

David has a long history of recommending this stock, even after it has posted mouthwatering gains.

When he told Stock Advisor members to buy Amazon in September 2002, many called him. After all, Amazon was up nearly 800% from its IPO.

But those Foolish investors who followed his advice are up 1,290% today -- even after the recent market tumble.