PriceSmart (PSMT): Bringing the warehouse store concept to Latin America

By Paul Goodwin, Editor of Cabot China & Emerging Market Report
From Cabot Wealth Advisory 5/17/12 Sign up for free Cabot Wealth Advisory e-newsletter

My stock pick for today is a useful illustration of the challenges of growth investing. It’s PriceSmart (PSMT), a company that’s bringing the warehouse store concept to Latin America.

PriceSmart has an interesting pedigree; it’s the brainchild of Sol Price, the man who invented the warehouse store concept back in 1976. Price and his son sold their company (called Price Club) to Costco in 1993, then looked around for a new territory. They found it in the Caribbean and Central America.

PriceSmart now has more than a million cardholders who shop at the company’s 29 owned and operated stores in 12 countries and one U.S. territory and annual revenues are $1.9 billion. Revenue growth has been consistently above 20% per quarter for the last seven quarters.

The challenge I referred to was PSMT’s price action following my recommendation of the stock for my subscribers in late October 2011. PSMT began 2011 with a three-month correction, but had appreciated strongly from 31 in March to 77 when I recommended it.

At that point, the stock began a tortuous correction/consolidation that pulled the stock as low as 57, but never quite went over the falls. I advised bailing out in mid-November with the stock at 64.

Then came March, and PSMT, which had been range-bound for four months, made a strong two-month run that pushed it to as high as 84! Clearly the market has a cruel sense of humor.

The cranky market of the past three weeks has dropped PSMT back below its 25- and 50-day moving averages on middling volume. It’s still not cheap, with a P/E ratio of 31. But for a high-quality company with a slow-but-sure expansion strategy (and a stock that pays a small dividend: forward annual yield of 0.8%) PSMT looks like a long-term winner.

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Paul GoodwinPaul Goodwin
Emerging Markets Specialist, Analyst and Editor of Cabot China & Emerging Markets Report

A researcher and writer for over 30 years, Paul Goodwin has been a member of the Cabot investment team and editor of Cabot China & Emerging Markets Report since 2005. Under Paul’s stewardship, Hulbert Financial Digest rated Cabot China & Emerging Markets Report the number-one-rated newsletter of 2006 with a 78.6% gain for the year, the number-one-rated newsletter of 2007 with a 74.1% return.