Kohl’s Corporation (NYSE:KSS) is what I would classify as a “second tier” type of investment.
It doesn’t have that quality aspect of your typical well-known dividend growth company. It’s not like a Coca-Cola Co (NYSE:KO) or PepsiCo, Inc. (NYSE:PEP). Those companies can charge 40% as much as the generic product sitting right next to it on the shelf, and yet over and over again people go home with the brand name.
The name isn’t really a strong draw for consumers – you buy a Nike Inc (NYSE:NKE) tennis shoe because you like the brand. You go to Kohl’s to buy a pair, not the other way around.
Granted there is certainly some loyalty associated with the business, but if you want Nike shoes and Kohl’s doesn’t have them, your purchasing dollars are likely to be loyal to the shoes, not the store. It’s not even like a Wal-Mart Stores, Inc. (NYSE:WMT), where you have massive scale or consistently lower prices.
The economics are good – it makes money every year – but it doesn’t necessarily have the staying power of some of the best companies out there.
As Warren Buffett might suggest, there are only so many “inevitables” – companies you know that will be around say 40 years later.
So before we get into anything about the security, I want to make that point clear. If you only want to partner with the very best companies, a security like Kohl’s probably wouldn’t hit your radar screen.
So you have to consider your comfort zone. If you’re fine with holding some “good” and “very good” firms, instead of (or I suppose in conjunction with) the “best” companies it expands your possibilities, but it also opens you up to accepting potentially lower quality businesses into your portfolio.
To continue with this article, let’s suppose that you’re comfortable owning some “good” or “very good” companies.
The second thing that you ought to consider is whether or not the valuation reflects this sentiment. You want to be compensated for agreeing to take a step back from the “inevitables.”
It’s sort of like if your favorite ice cream flavor is chocolate and the ice cream stand happens to be having a sale of vanilla. If they were both selling for the same price (or value), you’d pick chocolate every single time; no question about it. But if vanilla is noticeably cheaper, this could make the decision a bit more difficult. The value proposition is harder to calculate.
If you hate vanilla, then obviously you’re going to pay up for chocolate; but really, who hates vanilla?
If you think chocolate is only slightly better, then you may very well go with vanilla for the better perceived value. For instance, if during the next month you could have say 5 vanilla ice cream cones for the same price as 4 chocolate ones.
Incidentally, this is basically how the investing world works as well.
If Visa Inc (NYSE:V) sold at the same valuation as say Viacom, Inc. (NASDAQ:VIA), it’d be easy to suggest that Visa ought to be selected. Yet that’s not how it works with securities. Instead, you have a company with exceptional prospects trading near 30 times earnings against another trading under 10 times earnings.