Over the past six months, big-box retailer Costco (NASDAQ:COST) has proven itself to be a resilient holding for long-term investors. Costco stock fell below $300 per share in March but has since made its way to new highs amid the novel coronavirus outbreak.
Costco is always a buy on a pullback, but with the share price trading near all-time highs, is it still worth picking up?
The answer is yes if you’re a long-term investor. COST benefits from both long- and short-term catalysts that make it a valuable addition to almost any portfolio. With the market’s volatility set to continue through the end of the year, investors could start building a position in Costco stock slowly and keep the firm on their watch list to buy any future dips.
Costco Stock Is the Ultimate Pandemic Play
Unlike many other equities, Costco stands to benefit in almost any climate moving forward. COST stock is an obvious play in the event of renewed Covid-19 outbreaks or failed vaccine hopes. The company offers people a way to stock up on essential products at ultra-low prices. If we learned anything from the first coronavirus wave, it’s that people like to panic-buy when the threat of a lockdown is looming.
But Costco also appeals if the pandemic is brought under control and the U.S. finds itself in a prolonged recession. If economic uncertainty causes consumers to cut back substantially, subscription services will be under threat.
But a Costco membership is likely to be one of the last to go. That’s because paying Costco’s membership gives people access to low prices on everything from tires and fuel to bread and meat.
There’s a case for Costco in the ideal scenario as well — a quickly contained pandemic and a v-shaped recovery that yields economic growth sooner than expected. In that case, not only will members be unlikely to cut their membership, but more small businesses will reopen, potentially increasing their Costco purchases.
Near-Term Catalysts
In the short-term, Costco looks like a worthwhile pick. Whether or not the U.S. will be able to get control of it’s surging case numbers is up for debate, but there’s no question that there’s a real threat of renewed lockdowns in several states right now.
That threat should continue to push COST stock upward as investors look for pandemic-proof bets.
Not only that, but Costco appears to be on track to report impressive earnings for its fiscal fourth quarter. The firm’s Q3 results were relatively muted as its April sales put a damper on rising demand in March. But strong performance over the summer should offer investors something to cheer about when the firm reports for Q4.
Like the rest of its peers, Costco has been hit with coronavirus-related costs like increased sanitation, worker protection, and wage increases. But strong sales growth and improving margins should more than make up for that added expense.
Beyond the Pandemic
So-called “pandemic stocks” like COST are having a moment in the sun right now, but long-term investors should consider who will win and lose once coronavirus is behind us. Netflix (NASDAQ: NFLX) is one example of this.
Despite its all-star performance during the pandemic, the firm’s guidance suggests that the back half of the year could be a challenge in current conditions. In short, Netflix’s pandemic-boost is over.
Costco doesn’t have that issue. Its customers were loyal before the pandemic — the firm has enjoyed a subscription renewal rate above 90% for the past few quarters. That’s despite a 5% increase in membership fees.
The Bottom Line on Costco
Costco is one of the best retailers on the market because of its unique business model. The firm makes most of its money through subscription fees, which makes for very predictable income. As past quarters have proven, Costco members are sticky and tend to continue renewing even in periods of economic slowdowns.
There aren’t many stocks on the market that offer a compelling case no matter how the pandemic plays out and COST stock is certainly one of them.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
