The Biggest Reason Costco Stock Is a Buy

Whether you realize it or not, COST stock is a play on the strongest mega trend of our time

COST stock - The Biggest Reason Costco Stock Is a Buy

Source: Mike Mozart via Flickr (Modified)

Wholesale club Costco (NASDAQ:COST) has some impressively die-hard fans among its customer base and has managed to impress Wall Street so far this year. Since the start of 2018, COST stock has gained 22%. Zoom out to the last 12 months, and COST stock has a 44% surge in the books.

Yet that upward momentum has many people wondering whether COST stock is ripe for a fall. While the stock’s current level doesn’t make for the best entry point I’ve ever seen and some consolidation is potentially looming in the short-term, I’m still extremely bullish on Costco shares’ long-term outlook.

The grocery business is notoriously tough to navigate. The business’s margins are razor-thin and competition is stiff. Costco is competing against a laundry list of names: Kroger (NYSE: KR), Walmart (NYSE: WMT), Target (NYSE: TGT), and BJs (NYSE: BJ), but also online companies like Amazon (NASDAQ: AMZN), health-conscious chains like Whole Foods, and startups like Imperfect Produce and Instacart.

But Costco, with 750 warehouses in the United States and beyond, has carved out a substantial niche in the discount world, and that has translated to extremely strong fundamentals. A quick sample: The company is slated to post over 20% earnings growth this year, while its bottom line is expected to rise by an average of 12% over the long-term. And that’s largely organic growth , with 9% sales growth expected this year and next year’a revenue expected to increase 7%.

Strong fundamentals are especially important because they give Costco the foundation it needs to innovate as the grocery industry evolves. For example, the company introduced a delivery service last year (although it does not include fresh or refrigerated foods), and it has consistently posted strong e-commerce numbers.

In July, Costco’s e-commerce sales grew 20% year-over-year. In June, they jumped 28%. And year-to-date, its e-commerce sales are more than 30% higher than they were at this point last year. For the cherry on top, Costco has a strong balance sheet and the scale to invest in additional changes as the grocery shopping landscape inevitably continues to change.

But those aren’t even the most important reasons I like Costco. I’m a fan of COST stock because of the unfortunate reality that income inequality is perhaps the staple issue of the current era, while wages have been stagnant for some time. There are more and more people struggling to squeeze everything they can out of every paycheck, and that phenomenon is precisely what a store like Costco caters to. It’s a destination for essential, every-day items that will, more or less, always be in demand.

The only issue, once again, is that Costco’s key role in the modern shopping world has left shares at a forward price-earnings ratio of 29, which is a bit high. And yet, despite the stellar run, COST stock is trading for an extremely reasonable price-sales ratio of 0.7. Add it up, and the mega trend that Costco represents outweighs the smaller, more random concerns about COST stock. Any consolidation that happens in the coming months should be used as an entry point.

As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.

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