As the dust settles, investors are scooping up stocks on sale left and right, pushed lower by last month’s selloff. One high-quality name in particular that’s bouncing back is Costco (NASDAQ:COST). During January’s wave of volatility, investors bid down COST stock by a double-digit percentage amount.
That drop was likely due to the perception that rising inflation, and the forthcoming increases to interest rates, will negatively affect its business.
Right after its big drop, I made the case why this pullback created a rare buying opportunity for Costco stock. It appears many had the same idea. Since writing that, shares have made their way back up to around $515 per share.
But before you think that you’ve “missed the boat,” keep in mind that it still hasn’t made it back to its high-water mark ($571.49 per share). Furthermore, historically high rates of inflation, while a possible risk factor, could more likely be a tailwind rather than a headwind for the company.
More importantly, the factors that have made this a top-performing stock remain in play. If you’re looking for a name to buy-and-hold for the long haul, this remains a great option.
COST Stock and Its Recent Rebound
So, why has Costco started to bounce back in February, almost as quickly as it dropped in January? Two things. First, like I discussed above, the market recognized it was a relative bargain after its sudden drop. In hindsight, investors may have overreacted when they cashed out of this name.
Second, COST stock has been bouncing back thanks to a strong January sales report. For the month, its U.S. same store sales were up 9.5%, topping analyst estimates calling for a 6.4% increase. Admittedly, much of this top-line increase may be due to inflation. Per Consumer Price Index (CPI) numbers, consumer prices in the U.S. are up 7% year-over-year. For reference, that’s a rate of inflation not seen since the 1980s.
To some, the fact this big increase is attributable to inflation may mean it’s unwarranted to be excited about it. After all, while rising prices may mean higher revenue, it means higher operating costs as well. Inventory’s going up, wages are going up. The supply chain crisis has also resulted in a big jump in shipping/transport costs. All of this could in theory put the squeeze on Costco.
I would keep this risk in mind before buying, whether you are risk-averse, or are not so concerned about downside risk from inflationary factors. As this is a great stock to accumulate and hold over time, you may want to dollar cost average it instead of buying a position all at once. But while it’s wise to give consideration to its risks, keep in mind as well that the “buy in bulk” retailer could benefit from recent pressures too.
Inflation May Not Destroy the Bull Case for Costco
To those more bearish on COST stock, it may appear as if it has big downside risk, given the inflation issue, plus its high price-to-earnings (P/E) multiple of 40.3x. The company has been able to maintain a premium valuation, due to its consistent sales and earnings growth.
Yet if inflation does take a bite out of earnings, investors may re-price the stock more in line with its more moderately valued peers in response. Although I mentioned the possibility that inflation hurts more than helps Costco, taking a look at the facts, it’s hard seeing that end up being the case.
At the very least, rising food and consumer electronics prices (two key product offerings at its stores) may not affect the company as much as you think. Despite its reputation as a “discount” retailer, it has historically had an affluent customer base. These higher income households, which have the cash to buy in bulk up front, are less likely to cut back on their Costco runs.
In fact, it could actually see a boost in sales from its existing customer base. Cutting back at traditional grocery stores instead, the chain’s customer base may decide to spend more of their household budgets at its stores. This could enable the company to meet or beat earnings expectations. In turn, this could enable shares to bounce back to their all-time highs.
The Verdict on COST Stock
After selling it too hastily last month, the market is getting back into Costco shares this month. Take into account that inflation may help the company more than it hurts it, and shares, which earn a “B” rating in my Portfolio Grader, could continue to bounce back.
Thinking longer term, going forward it may make more gradual moves higher than it has in the recent past. Even so, this long-term compounder still stands to produce solid returns in the years to come.
Bottom line: It’s not too late to “buy the dip” in COST stock.
On the date of publication, Louis Navellier had a long position in COST. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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