Stock market volatility has been keeping investors up at night for months, and there doesn’t appear to be an end in sight. Interest rates continue to rise, and unemployment is low. That suggests the prices of basic goods and services will keep going up. Most economists and market experts believe a recession is coming – perhaps as early as the second half of 2023. By every measure, now is the time to consider recession-proof stocks.
One of the most promising is Costco, a warehouse chain that consistently outperforms the competition. What sets Costco apart from its competitors? Does Costco have a moat? Will Costco stock go up even more?
Costco Is a Global Brand
Costco is a leading wholesale club that offers its members substantial savings on essential goods and services. The company and its subsidiaries operate roughly 800 warehouse stores throughout the United States and Canada, as well as in Australia, China, France, Iceland, Japan, Korea, Mexico, Spain, Taiwan, and the United Kingdom.
Costco sells memberships that allow consumers to shop in the warehouse stores, which have a no-frills design. The stores carry around 4,000 items versus the average 30,000 items found in a traditional supermarket.
The reduced selection allows Costco to buy in bulk, and the savings realized from minimal interior features, limited brands, and bulk buying is passed on to members. Those who shop at Costco regularly quickly recoup the membership fee and enjoy substantial savings on essential products.
Costco Earnings Report
Costco’s most recent earnings report, which was released May 25, 2023, raised a few eyebrows among analysts. Sales increased a mere 1.9 percent year over year, and earnings per share dropped from the previous year’s $3.05 to $2.93.
Analysts had projected earnings per share to grow to an estimated $3.29. However, despite the seemingly disappointing results, Costco stock went up. Why? Because the core business is expanding, and that is a sure sign of long-term success.
Among other positive news, business leaders noted that changes in foreign exchange rates and gas prices contributed to the lower-than-expected sales. But for those challenges, sales would have been markedly higher.
Costco reported a 6.1 percent increase in membership fee income, which would also have been higher but for foreign exchange rates.
Better still, Costco has grown the number of members in its highest tier by quite a bit. That’s important because the top-tier group makes up 45 percent of all paid members, and they are collectively responsible for 73 percent of sales worldwide.
Clearly, Costco is successfully navigating the complexities of global economic conditions, and it is in a relatively recession-proof industry: consumer staples. The only question then is whether Costco can maintain its competitive edge against companies like BJ’s, Walmart, and Target. In other words, does Costco have a moat?
Does Costco Have A Moat?
When compared to traditional supermarkets, Costco has a considerable moat. Its ability to buy in bulk and negotiate lower prices attracts budget-conscious consumers. However, the more critical question is whether Costco has a competitive advantage over other warehouse stores, and the answer is decidedly yes.
First, Costco’s profitable private label, Kirkland Signature, is quite popular among members. Second, members renew at a rate of more than 90 percent each year, which is important because that’s where Costco makes its money.
Though membership fees only make up about two percent of the company’s revenue, more than three-quarters of Costco’s net income comes from those fees – not from merchandise sales.
Is Costco Stock A Buy?
There are several key metrics to consider when deciding whether Costco stock is a buy. For example, it’s important to understand whether the price is fair relative to the company’s value.
There are certain key data points that may suggest Costco stock is overvalued, as it trades at a Price-to-Earnings (P/E) ratio of slightly of 37x.
The average for the discount stores industry ranges between 32x and 33x. Is that a dealbreaker? No. Other factors could outweigh this metric, but it’s important to keep in mind when evaluating the company.
How a company handles its debt is another area to examine before making the decision to buy stock. In Costco’s case, there are a number of points in its favor. That includes the fact that Costco has more short-term assets than short-term liabilities, and it has operating cash flow of $9.54 billion.
That’s more than the amount needed to service its $9.14 billion in debt. In addition, Costco is paying down its debt. Over the past five years, debt is lower as compared to shareholders’ equity.
Approximately two-thirds of the analysts who conducted a detailed review of the company say that Costco stock is a buy and/or overweight.
The average 12-month price target is $541.62 per share, with a low of $465 per share and a high of $610 per share. Those projections, coupled with Costco’s strong reputation, solid financial state, and sustainable competitive edge make Costco stock a buy.
How To Buy Costco Stock: The Basics
The good news is that there is no trick to buying Costco stock. It is publicly traded on the NASDAQ under the ticker symbol COST. Shares can be purchased through any traditional or online brokerage firm.
Step 1: Open A Brokerage Account
New investors typically choose to open a brokerage account online, because these platforms are low-cost and easy to use. Popular options include tastytrade (formerly tastyworks), Robinhood, Merrill Edge Self-Directed, E-Trade, and SoFi.
The best have no-fee, no-commission trades, and ideally, the brokerage platform should offer access to a variety of asset types, such as stocks, mutual funds, and exchange-traded funds (ETFs).
A handful of online brokers make it possible to buy fractional shares – that is, part of a share when the full price is too high. That can be helpful in the case of stocks like Costco, which currently trades at more than $500 per share.
Getting started is simple. Go to your selected platform and choose the “Open an Account” button. Enter basic information, including details like full name, address, and social security number. It may be necessary to upload copies of identification documents due to federal and state regulations.
Step 2: Fund Your Account
One of the biggest benefits of online banking and investing is the ability to transfer funds electronically.
Once the brokerage account is open, connect it to a standard deposit account, then choose the option for a funds transfer.
Most online brokers do not have minimum balance requirements to begin trading.
Step 3: Research Potential Investments
It’s tempting to buy stocks based on social media recommendations or media reports that say share prices are about to go up. Unfortunately, this is almost always a mistake. By the time most investors manage to make a trade, the fad has passed. They lose money instead of making it.
A far better strategy is to carefully research companies to be sure that they are on solid financial ground. Companies with a sustainable competitive edge – what billionaire investor Warren Buffett calls a “moat” – and talented management are far more likely to deliver profits than a stock that is trending online. Costco meets all of those criteria, which makes it a solid choice when deciding which stock to buy.
Step 4: Buy Stock
There can be small differences between online brokerage platforms when it comes to making a trade, but for the most part, it is a matter of finding the correct stock and clicking on “trade” and then on “buy.” Fill in the number of shares you wish to buy, and then decide between a market order or a limit order.
Market orders are executed as soon as possible, and the shares are purchased at the current market price. Market orders should be used cautiously when trades are placed after the market closes, as the orders are executed almost immediately when the market reopens. If the share price has changed between the time the order was placed and the time it is executed, you could find yourself paying more than you intended for the stock.
The alternative is a limit order, which establishes a maximum price for a purchase (or a minimum price for a sale). The trade is still executed as soon as possible, as long as the price meets the threshold of the limit order. If the price is not at or better than the limit you set, the trade is eventually canceled.
Step 5: Monitor The Stock
It’s a good idea to monitor stocks – and the market as a whole. Online brokers offer tools like watchlists that can send alerts based on criteria you set – e.g., reaching a specific price. However, there is a caveat. You have to be comfortable with the market’s natural ups and downs.
Stocks rise and fall constantly, and in some cases, the inclines and declines are quite steep. When your research indicates the company is likely to deliver long-term success, watch out for the common error of selling out of fear when the stock price goes down. In fact, price drops can mean big opportunities, because the stock is “on sale.” Consider buying additional shares when prices are low to increase returns over time.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.