For investors looking to assemble a portfolio of lasting, high-standard businesses, the ideas of quality investing offer a useful structure. This method centers on finding companies with durable competitive positions, reliable earnings, sound financial condition, and the capacity to produce high returns on capital over many years. One orderly way to find these companies is the "Caviar Cruise" stock screen, which uses a set of numerical filters to find firms with a record of solid growth, high returns, and financial care. The screen stresses measures like continued sales and earnings growth, a high return on invested capital (ROIC), sensible debt amounts compared to free cash flow, and trustworthy earnings where reported profit is regularly turned into actual cash.
A recent run of this screen has found Costco Wholesale Corp (NASDAQ:COST) as a leading example for more review by investors focused on quality. The warehouse retail leader seems to fit the main standards of the method, showing the financial durability and operational skill that mark a quality company.
Fitting the Main Quality Standards
The Caviar Cruise screen employs a few important filters to judge a company's quality. Costco's financial picture matches these marks well:
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Sales & Earnings Growth: The screen asks for at least a 5% compound annual growth rate (CAGR) for both sales and EBIT (earnings before interest and taxes) over five years. Costco passes both limits easily, with a 5-year sales CAGR of 7.17% and a more notable EBIT CAGR of 11.20%. Importantly, EBIT growth rising faster than sales growth, as shown here, is a sign of better operational efficiency and possible pricing strength, a main point of the quality screen.
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High-Quality Capital Use: A central idea of quality investing is a company's skill in producing high returns on the capital it uses. The screen requires a Return on Invested Capital (leaving out cash and goodwill) over 15%. Costco does very well here, with an ROIC of 33.67%. This shows the company is very good at using capital to create earnings, a signal of a lasting competitive position and able management.
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Financial Soundness and Earnings Trustworthiness: The method values financial safety and the dependability of stated earnings.
- Debt Handling: The screen checks for a Debt-to-Free Cash Flow ratio under 5, meaning it would need less than five years of present cash flow to settle all debt. Costco's ratio of 0.64 is very good, showing little financial danger and ample ability to fund expansion, return cash to shareholders, or handle economic slowdowns.
- Earnings Trust: This measure checks how much net income becomes free cash flow. The screen wants a 5-year average over 75%. Costco's average of 92.22% shows that its accounting earnings are regularly supported by actual cash, pointing to maintainable profits with little need for non-cash changes or forceful accounting.
Basic Health Review: A Summary
A wider look at Costco's basic measures, as shown in a detailed review report, backs the screen's results. The company gets a good overall basic rating, with special high points in profitability and financial condition. Its high returns on equity and assets, together with a clean balance sheet shown by a strong Altman-Z score and low debt, describe a financially sound business. While growth is likely to stay positive, analysts foresee a slowdown from past highs. The main debate for any investor is price; Costco sells at a large premium to both the wider market and its industry group, showing the market's readiness to pay more for its quality traits.
The Non-Measurable Quality Benefit
Beyond the countable measures, Costco shows several non-measurable traits that fit the thinking of long-term quality investing. The company has a strong competitive position through its membership model, which builds deep customer loyalty and gives a repeating income source. Its method of low margins on high volume is easy to grasp. Also, its worldwide presence and focus on needed goods give some safety from recessions. These parts add to the company's shown skill to grow across different economic periods, a non-countable feature highly valued by quality investors.
Locating Other Quality Examples
Costco Wholesale acts as a clear example of the kind of company the Caviar Cruise screen is made to find. For investors wanting to examine other businesses that pass these strict quality filters, you can see the present screen results directly using the Caviar Cruise stock screener.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or an offer to buy or sell any security. The review is based on data and a specific screening process; investors should do their own complete research and think about their personal money situation and risk comfort before making any investment choices.
