Like Many of Costco’s Deals, Its Stock At Current Low Price Won’t Last

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Costco Wholesale Corporation (NASDAQ:COST) stock has a well-earned reputation for breaking all the retail rules. That refusal to play the same game as other retailers has paid off nicely for long-term COST stock investors.

A Costco Wholesale (COST) warehouse in Auburn Hills, Michigan.
Source: ilzesgimene / Shutterstock.com

Their shares have delivered a very respectable 191% gain over the past five years. If you factor out the pullback that’s hit COST since the start of the year, the number is actually 255%. That pullback — and the opportunity it offers — is what I’m looking at today.

As I said, Costco doesn’t follow the same playbook as other retailers. The company’s business model puts it in an advantageous position even when there are challenging economic factors like the interest rate and inflation fears that have wreaked havoc on the stock market in 2022.

COST stock has been hit by those fears. It’s not immune to a broad reaction to economic concerns. But in the case of Costco, having its shares battered represents a rare opportunity to buy at a discount. Here’s why now is the perfect time to add COST stock to your long-term growth portfolio.

Costco’s Different Way of Doing Things

Costco defies traditional retail rules in many ways. A large part of the Costco appeal is its groceries, but it also carries clothing, TVs, computers, and tires, and more. Despite the huge range of retail ground (and physical space) a Costco store covers, the number of products you’ll find inside are surprisingly limited.

In 2020, the average U.S. supermarket carried over 31,000 different items. In comparison, Costco stores carry around 4,000. Adding to the “rule-breaking,” many of those items are carried for a limited time, then rotated out.

Shopping at your local grocery store or department store is free. Anyone can simply walk in, grab a cart, and start shopping. Costco is for members only. Shopping at a Costco store requires paying for a membership.

This has an interesting effect on consumers. In 2017, the Financial Post interviewed Allison Johnson, then a professor of business with a focus on consumer psychology at Western University’s Ivey Business School. Professor Johnson explained the effect of that paid Costco membership:

“Once you have paid to belong to something, once there is a cost to enter, you feel more strongly attached to it. There is a psychological sunk cost, and an exclusivity. They check your card at the cash. It makes it seem as though there is something going on that is special in there.”

All of these factors play into Costco’s favor during tough times as well as good times. Selling large quantities of limited items gives Costco more leverage with the suppliers of those products. They will be more reluctant to pass on rising costs than they would with a retailer where their product is one of just 30,000+ on store shelves. The customers who are paying for a membership are going to be even more determined to get their money’s worth as inflation and interest rates bite.

Rising Inflation and Interest Rates Have an Upside for Costco

As I wrote several weeks ago, there’s another reason why rising inflation and interest rates have  an upside for Costco. Under those conditions a classic consumer coping strategy is to save money by buying in bulk. This cuts the number of trips to store but more importantly, it cuts overall costs. Costco is seen as the gold star in bulk shopping opportunity. 

In its first-quarter 2022 results (reported last December), Costco added 800,000 new paying members. Just as importantly, it’s retaining those members, with annual renewals at 91.6% in the U.S. and Canada. Sales were also up 16.7% year-over-year.

Even big ticket items like TVs have potential upside for Costco. When rising prices and interest rates make buying the latest big screen TV from an electronics retailer a costly proposition, Costco has lower cost alternatives. Many may be last year’s models, but they are premium name brands and priced low enough that financing may not even be needed. 

Inflation hasn’t taken a bite out of Costco’s business. If anything, it’s becoming a catalyst for more consumers to buy a membership.

The Bottom Line

Costco does very well during “normal” times. It thrived during the pandemic, when shoppers stocked up on essentials while minimizing trips. And so far, it’s doing just fine as inflation and the threat of rising interest rates begin to bite.

The current COST stock pullback isn’t unprecedented. Shares have stumbled several times over the past five years. But the downturn doesn’t last long and they always come roaring back. In fact, that’s been the COST stock story since 2010. In case you’re wondering, its up nearly 750% since then.

If you’re looking for a long-term growth stock you can count on for your portfolio, COST should be on your list. It scores a strong “A” rating in Portfolio Grader. The current price, which has shares down 9% since the start of the year, is a chance to add it at a Costco-sized discount. 

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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