Costco Wholesale (NASDAQ:COST) has been one of the best stocks of all-time. Including dividends and spin-offs, Costco stock has returned over 48,000% since its 1985 initial public offering. That’s an annualized return of over 19%.
Just $10,000 invested in that 1985 IPO today would be worth nearly $5 million today. That’s how much value Costco has created for its shareholders on the public markets.
Certainly, investors can’t expect quite those same returns going forward. After all, if Costco delivered that same 19% return for the next decade, its market capitalization would be near $700 billion. That’s more than Walmart (NYSE:WMT) and Home Depot (NYSE:HD) are worth combined.
That doesn’t mean there’s no upside left in Costco stock. Admittedly, shares aren’t cheap. But they shouldn’t be.
And with a recent pullback, even including a big bounce in trading on Monday, investors have an opportunity to own one of the market’s best companies at an attractive — even discounted — price.
The Case for Costco Stock
One of my investment maxims is to choose the leader in an industry. “Cheap” stocks usually are cheap for good reason. Investors should pay up for quality rather than trying to buy a struggling, or declining, business.
Overall, it’s hard to argue with the quality of Costco as a business. It dominates its niche, and bear in mind that Walmart actually beat Costco to the wholesale model. Its first Sam’s Club launched in April 1983, while the original Costco didn’t open until six months later.
However, that hasn’t mattered. In Walmart’s fiscal fourth-quarter and 2020 report, Sam’s Club generated just under $59 billion in sales. Additionally, BJ’s Wholesale Club (NYSE:BJ) is projected to do about $13 billion over the same period.
Moreover, Costco — over its last four reported quarters (ending November of last year) — drove sales of just over $150 billion. That’s more than double the total of its two primary competitors.
That said, Costco’s edge goes beyond sheer size. Sam’s Club shut 63 stores without warning in 2018. Meanwhile, Costco opened 20 stores in its fiscal 2019, and plans to open “another 20-ish” this year, as CFO Richard Galanti put it on the fourth quarter earnings call.
In Costco’s fiscal first quarter, which ended Nov. 24, adjusted U.S. same-store sales rose 5% excluding fuel. In Walmart’s fourth quarter, which ended Jan. 31, Sam’s Club comparable store sales, excluding fuel and tobacco, rose just 0.8%. BJ’s comparable club sales increased 1.5% in the first three quarters of its fiscal year, and that company reports Q4 on Thursday.
Collectively, Costco is bigger than its rivals and growing faster than them. Without question, it is the premier operator in the space. And that alone supports the long-term case for Costco stock.
Two Tailwinds for Costco
However, there are two more tailwinds to consider for COST shares. First, coronavirus fears may actually help near-term sales. That appears to be driving the bounce in Costco stock on Monday, which ended the day up about 10%.
In other words, nervous consumers are stocking up. And there’s no better, or cheaper, place to do so than Costco. So, while some of those sales may be one-time, Costco may also attract new members over the long haul. Remember that membership fees, not product sales, drive most of the company’s profit.
Looking out further, Costco has a massive opportunity in China. Back in August, I highlighted the opening of the company’s store in Shanghai on my Moneyline podcast. That opening saw an unbelievable rush of buyers, and the store had to close early and wait times just for parking spots reportedly exceeded three hours.
Moreover, the interest wasn’t just one-time. The Shanghai location, as of the December earnings call, already had one of the highest membership bases in the entire chain. Its early success proves that China is a massive opportunity for Costco. And as more stores open in that market, efficiency will improve — and so will profit margins.
Combine industry leadership and a massive international opportunity, and there’s the potential for decades of earnings growth ahead even after an unbelievable 34-year run.
Costco Is Cheap — COST Isn’t
To be sure, investors value Costco stock dearly. Shares right now trade hands at a whopping 34 times the consensus fiscal 2020 earnings per share estimate. WMT, HD, Target (NYSE:TGT), and many other quality retailers are available at a cheaper valuation.
But, again, investors should pay up for quality, and for long-term growth potential. As legendary investor Warren Buffett put it, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
In retail, in particular, with Amazon (NASDAQ:AMZN) hovering over the entire industry, there’s been no shortage of fair companies available at wonderful prices. Most of those prices have only become more “wonderful.”
Yet, none of those companies are nearly as wonderful as Costco. The company has grown sales to over $150 billion by delivering value for customers. And in the process, it’s done the same for shareholders.
Therefore, I see no reason why that should change. And with COST still trading at a discount to recent highs even after Monday’s gains, there’s an opportunity to buy on the pullback.
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.