CWS Market Review – May 20, 2025

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Moody’s Downgrades America

On Friday, one of our Buy List stocks made international news. Moody’s cut its rating on the United States of America’s debt by one notch. The USofA is now rated Aa1. Prior to the cut, Moody’s had given the U.S.A. the biggest prize in finance, the coveted AAA rating. Moody’s had rated America’s debt AAA since 1917.

The other two big debt raters, Fitch and S&P, had already cut their ratings on America’s debt. Moody’s was the lone holdout.

Is this something to worry about? Eh, not really. Personally, I don’t get too worked up about these kinds of things. These events generate headlines more than they tell you about finance. For one, S&P cut its rating in 2013. Fitch joined in two years ago. I doubt that many people even noticed.

Also, I think it’s a little silly. Having a rating on America’s debt is like having an opinion on the sun. What is there to say?

It’s true that America’s debt has reached a staggering level. According to the “Debt to the Penny” website, our public debt stands at $36,215,714,628,553.09. In Washington, both parties are busy blaming each other for the mess. That’s hardly a surprise. The immediate cause for the debt downgrade is President Trump’s “One Big Beautiful Bill Act,” which he’s been pushing Congress to pass.

Moody’s said “the decision to downgrade debt was influenced by ‘the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.’” If that’s true, then a downgrade could have come at any time in the last several years. I don’t know why they’re choosing now.

When Ronald Reagan was asked if he was worried about the budget deficit, he said no, it’s “big enough to take care of itself.”

One upshot is that Moody’s doesn’t appear to be interested in cutting its rating again. The company rates America’s debt as stable. Well, that’s good to know.

In a sense, America’s debt is judged every day—in fact, every minute of every hour of every day—by the global bond and currency markets.

It’s true that our government has been remarkably irresponsible with our finances, and there’s plenty of blame to go around. However, there’s an inescapable fact that investors all over the world want to own our debt, and they’re willing to pay for it. That tells me a lot more than what Moody’s has to say. Bear in mind that the S&P 500 just ran off 17 up days in the last 20 trading sessions. If it were truly a big deal, then markets would reflect it.

To be honest, I have been concerned by the recent rise in Treasury yields. The yield on the 30-year Treasury recently spiked above 5%, and the yield on the 10-year Treasury is close to 4.5%.

I also like to watch the TIPs yields which are adjusted-for-inflation bonds. The yield on the 30-year TIPs is now about 2.6% which is close to as high as these bonds have ever traded, with data going back more than 20 years. As recently as three years ago, the yield on the 30-year TIPs was negative. In a sense, we’re returning to normal.

The stock market tends to perform worse when TIPs yields are high, and that makes perfect sense. I suspect that the higher yield on TIPs reflects a change in risk tolerance.

Overall, I’m concerned about America’s fiscal standing, but I’m watching the market’s reaction rather than a ratings agency.

I Missed Out With Costco

I’m going to engage in a bit of self-criticism, and I hope to convey some important lessons about investing. I’m a big fan of Costco, and I completely screwed up with it.

I studied the company intently. I even wandered up and down the aisles and took notes. (It’s a wonder I was never kicked out!) Gradually, I became a huge Costco fan.

It’s a very well-run company and its earnings have grown consistently for many years. Costco has a renewal rate of 93%. The company has all the qualities I look for in a stock, except one: Costco has a very high valuation. Very high.

This fact had led me to decline from adding it to the portfolio. No matter how many times I ran the numbers, it always looked to me that Costco was way too pricey, and I can say that with full confidence, I was dead wrong.

The stock kept moving higher. Just because it was overpriced was apparently no barrier to it becoming even more overpriced.

Check out this chart. In 16 years, Costco is up 35-fold. I don’t know if there ever was a bad time to buy it.

Let me go into more detail why I’m such a Costco fan. For one, I love Costco’s business model, and its customer base is very loyal. Some might say cult-like. Importantly, the company generates recurring revenue from its membership fees, and the cash flow is stable. As investors, we love recurring revenue.

The idea is simple. There’s a lot of savings in buying in bulk. If you need to buy a 17-pound tub of mayonnaise, Costco is the place to go. In addition to bulk-buying, Costco is obsessed with efficiency.

The company runs about 800 warehouses, and the average location generates about $275 million in revenue per year. The margins are very thin, meaning the markups are quite small.

For the last fiscal year which ended in August, Costco generated a profit of $7.4 billion off sales of $250 billion. That works out to about 3%. I don’t think people realize how tiny that is.

At its core, Costco is really a business dedicated to turnover and efficiency. As soon as a product is on their shelf, they want to get rid of it as soon as possible. Costco runs a very tight ship. Walmart carries about 10 times the number of items. Costco keeps it simple.

From Fast Graphs, this is Costco’s stock (in black) along with 30 times its earnings (in blue) and dividends (in tan).

The blue line is a P/E Ratio of 30, which isn’t cheap, and you can see how the black has quickly run past that.

Costco also runs its own private label Kirkland brand which makes up for about one-quarter of Costco’s overall sales. That by itself is a major business. Costco is also very good at using popular items as loss leaders like rotisserie chickens or their famous $1.50 hotdogs.

Costco knows that if you get people in the store, and feed them, they’ll probably stick around and buy something. In fact, people seem to enjoy the price-hunting experience. Costco, of course, has no plans to change the price of its hotdogs.

I also like that Costco tends to be countercyclical. In plain English, that means Costco does well when the economy runs off the road. That’s when people are looking for discounts. They have a helpful and knowledgeable staff. Costco employees are generally paid more than their competitors.

Have you ever seen an ad for Costco? Now that I think of it, I don’t believe I ever have. They do advertise, but not very much. Instead, they rely on word-of-mouth.

The membership model also encourages shoppers to go to a store. It’s a sunk cost. That’s because they already bought a membership so they figure they might as well use it.

Costco was also a point of contention between Warren Buffett and Charlie Munger. Charlie loved the stock, but Buffett was skeptical, and he never liked retail. Charlie was able to convince Warren to buy Costco and it became a huge winner for them. Costco even added Munger to its board.

After Munger passed away, Buffett decided to sell Costco, yet the stock continued to rally. Buffett conceded that his friend had been right all along.

In March, Costco posted a rare earnings miss. For its fiscal Q2, Costco earned $4.02 per share. That was nine cents below expectations. In six days, the stock fell 15%. The sale didn’t last long, and Costco has made back nearly everything it lost.

For this fiscal year, Costco is expected to make $18.12 per share. That means the stock is trading at 57 times earnings. Sorry, but that still seems way too expensive. (But I’ve been wrong before!)

In retrospect, my mistake was placing too much attention on the share price when I should have been focusing on what makes Costco so different.

Later this week, we’ll get reports on new and existing home sales. Next week, the Fed will release the minutes of its most recent meeting. Also, the government will update its report on Q1 GDP growth. The initial report said that the U.S. economy grew at a meager 0.3% for the first three months of this year.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on May 20th, 2025 at 5:19 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.