Today, I’m going to tell you why Latin American wholesaler PriceSmart, Inc. (NASDAQ:PSMT) will remain in “The World’s Greatest Retirement Portfolio” for at least the next year.
Performance thus far
For those who might not know, PriceSmart, Inc. (NASDAQ:PSMT) is a spin-off of North American counterpart Costco Wholesale Corporation (NASDAQ:COST). To this day, PriceSmart operates in much the same way as Costco, focusing on slow and steady growth while creating value for all stakeholders.
The original $4,000 that I invested in the company is now worth $7,075 — or a whopping $1,875 more than if I had simply invested in the SPDR S&P 500 ETF.
PSMT total return price data by YCharts.
Unexpected strength
If you go back and read my original recommendation from two years ago, you’ll see that I focused a lot on expats from North America. As baby boomers age, and health-care costs continue to skyrocket, many countries served by PriceSmart, Inc. (NASDAQ:PSMT) become attractive retirement locales — both for the nice weather, and the quality of health care. It was this growing population, I postulated, that would drive sales at PriceSmart.
It turns out I was wrong in a really great way: Locals love it, too.
Over the past two years, my wife and I have spent months volunteering at a tiny, isolated organic coffee farm in Costa Rica. The owners get nearly everything they need either from the land, or from the corner store just up the hill. That’s why I was surprised to find out one of the only reasons they’ll leave the village is to run to PriceSmart, Inc. (NASDAQ:PSMT) — which is more than an hour away.
Recently, the company has lowered its margins, in an attempt to increase volume and make the value more enticing for locals who might not have the same economic resources as expats do. This move has worked out, and it’s increasingly important as Wal-Mart Stores, Inc. (NYSE:WMT) begins to enter the markets PriceSmart dominates.
Two variables to watch closely
Moving forward, there are two key variables I’m watching to make sure PriceSmart, Inc. (NASDAQ:PSMT) is worth holding in my retirement portfolio. The first is the company’s expansion plan.
As Latin American markets mature, PriceSmart has an enormous opportunity. Though Brazil is largely dominated by Wal-Mart Stores, Inc. (NYSE:WMT), Costco Wholesale Corporation (NASDAQ:COST) has no plans to move south; the rest of South America is open for the taking. PriceSmart has already opened three stores in Colombia. The first two have done remarkably well, and the third only recently opened.
If PriceSmart, Inc. (NASDAQ:PSMT) opened more than five new stores in a year, I would be concerned; I don’t think there’s a need to rush in South America. Doing so could lead to hasty and unprofitable decisions. At the same time, if the company were to stop opening South American stores altogether, I’d also be concerned, as the stock’s price assumes that the move south will continue.
