All the fears that worried the market in the past are percolating. Inflationary concerns are rising, with oil prices near a six-week high, more tariffs, and geopolitical tensions in the Middle East unlikely to go away anytime soon. The Federal Reserve is likely to nudge rates higher — not lower — the next time it meets. Suddenly, everything that is borrowed is about to be something blue.
It’s against this unsettling climate, with consumer confidence hitting a new low before rebounding this summer, that investors might want to consider investing in Costco (NASDAQ: COST). Yes, Costco.
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The country’s top warehouse club operator may not seem much of a growth stock. It’s also certainly not cheap by most measuring sticks. However, if reality catches up to today’s buoyant market later this month, you’re probably going to learn the real reason why Costco is worth its market premium.
Welcome to Costco, I love you
Costco stock is trading for 47 times trailing earnings, a big markup to both the market average and the retailer’s own growth. Its revenue multiple may initially seem low at 1.4, but in the low-margin world of groceries and other consumer staples retail, it’s a princely premium. If you’re an income investor, the stock’s 0.6% dividend yield isn’t going to ring a dinner bell, even though Costco does reward shareholders with substantially larger special dividends every few years.
The warehouse club operator’s appeal in bear markets, if not outright crashes, lies in its resilience. Costco has posted positive net sales growth in 32 of the last 33 years. The one time it fell short was a modest 1.5% decline in 2009 during the Great Recession. It was a stalwart that year, as the U.S. corporate sector saw its revenue plummet 13%.
You beta, you beta, you bet
Costco’s beta — a measure of stock volatility — clocks in at 0.87, only slightly below the market at 1.00. However, the all-weather retailer’s one-year beta is roughly zero. Put another way, over the past year, Costco shares haven’t moved in step with the market. If you’re worried about a market crash, this lack of correlation should excite you.
In a rising market, Costco investors have experienced a 2% decline. This may not seem bullish, but with Costco’s business continuing to expand and its dominance growing, its valuation has become even more compelling than a year ago.
