Costco (NASDAQ:COST) shares held steady as the novel coronavirus pushed the stock market lower. That’s no surprise, given the wave of panic buying as the pandemic hit America. But, while competitors like Walmart (NYSE:WMT) have made new highs, Costco stock has pulled back.
To me, that’s a sign Costco shares are a buying opportunity on the dip. Why? The company’s membership-based model gives it less volatile revenue. Granted, the company isn’t the only player in the club retailer space. Not only do you have publicly traded BJ’s Wholesale Club (NYSE:BJ), you also have Walmart’s Sam’s Club unit.
Yet, Costco is leaps and bounds ahead of these rivals. Not just in size, but also in growth potential. The company’s stores have continued to grow, while its peers tread water at best. In fact, places like Sam’s Club have closed stores, while Costco continues to expand its reach.
Yes, Costco stock isn’t “cheap.” Shares trade at a higher valuation multiple than its retail rivals. But, in terms of quality, and growth potential, shares offer a solid opportunity in today’s market.
Costco Stock Is ‘Crushing It’
Shares may have pulled back from their pre-pandemic highs. But the company’s operations have been stronger than ever. In March 2020, sales soared 11.7% from the prior year’s period. Yet, short-term tailwinds like the coronavirus are just the start.
What do I mean? I’m talking about how this short-term catalyst benefits long-term growth. Today’s crisis likely drove increases in Costco membership. And that’s the beauty of this company’s business model relative to traditional discount retailers.
The company generates positive gross margins on its retail sales. But membership fees are the real profit center. And with a stunning 90.9% renewal rate in North America, this represents a steady income stream for Costco. Yet, consistent revenue doesn’t mean the company faces weak growth. Thanks to a combination of same-store sales growth, along with consistent new store openings (16 new U.S. locations in 2019 alone), the big box bulk behemoth can keep the growth train humming.
But that’s not all! Costco stock also has an international catalyst in motion. Even better, a China catalyst in motion. As I’ve previously discussed, the company last year opened its first Chinese location in Shanghai. Not only did the Shanghai store do record business at opening. This location has one of the chain’s largest membership bases. I take this to be a sign the company has tremendous growth runway in China.
In short, Costco is not just a high-quality, growing business. The company has exposure to a key “megatrend,” the rise of China’s middle class.
With these kinds of catalysts at play, what more could you ask for? Yes, the stock trades at a premium valuation. But diving into the details, shares are worth the premium price.
Discount Store At Premium Valuation? It’s Worth It!
A big concern among investors looking at Costco stock is valuation. I agree, this is no value stock. Shares trade at a forward price-to-earnings ratio of 34.8. BJ’s stock certainly doesn’t command a similarly high earnings multiple. The smaller rival trades for just 15.5 times forward earnings.
Not even Walmart trades for such a premium valuation. It trades for 23.5 times forward earnings. I know, it sounds funny to say a discount store deserves a premium valuation. But don’t get lost in the weeds sweating over this.
Yes, Wall Street has taken into account the company’s many positives, and priced them into its valuation. Yet, that doesn’t mean the ship has sailed in terms of potential gains. Firstly, you have the potential appreciation from the stock rebounding from the recent pullback. Secondly, with strong growth likely to continue, shares will go up in tandem with increased earnings.
On the other hand, companies like Walmart may face challenges moving the needle. The big box rival projects low single-digits earnings growth, at best. BJ’s earnings guidance may exceed analyst projections. But, with anemic revenue growth, they’ll have a tough time maintaining earnings growth long term.
Simply put, Costco’s status as a leader in its space, along with solid financial performance, makes it a high quality stock to buy. Sure, you have to pony up a premium. But long term, it’s worth it.
Winners Like Costco Belong In Your Portfolio
Costco stock continues to trade below its 52-week high. And that’s despite the coronavirus tailwind, plus big catalysts that could help drive long-term growth. A leader in the big box bulk niche retail sector, the company is leaps and bounds ahead of its rivals.
Even as shares command a big valuation premium to peers, the stock is a screaming buy. My take? Costco stock belongs in your portfolio. Buy the dip, as soon as possible. The recent pullback likely won’t last for long.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
