As the coronavirus from China spreads, there have been a handful of stocks that have performed well. Costco (NASDAQ:COST) hasn’t rallied like some, but it’s held up much better than most. That relative strength, combined with its high-quality business, makes Costco stock a name to take a closer look at.
Shares are about 12% off the February high. That slightly lags a retailer like Walmart (NYSE:WMT), which is down about 10.5% from its highs. It’s slightly better than Kroger (NYSE:KR), which is about 15.5% off its highs.
However, the difference here is that Kroger and Walmart hit those high this month, as investors flock to these so-called coronavirus buys.
Buy Grocers or Buy Costco Stock?
There’s a mixed feeling about these types of plays. On the one hand, companies like Walmart and Kroger cannot keep their shelves stocked fast enough amid widespread panic buying. This isn’t a situation of investors profiting and taking advantage of a pandemic. It’s simply matter of fact.
It’s not as if Costco’s shelves are stuffed full of inventory — it’s as depleted as anyone else.
But Costco doesn’t make a bulk of its money on sales. Instead, it’s on memberships.
There’s a pro and a con for that model. The con is that, during times like these, Costco likely will not see the type of earnings explosion that other retailers will. The pro is that it should face less volatility, in addition to a meaningful increase in revenue and earnings.
Shares have been relatively steady despite the recent decline. Keep in mind, the S&P 500 is down about 35% from its highs, so Costco stock dropping just 12% is pretty impressive.
Comparatively, Kroger and Walmart have seen plenty of volatility over the past few weeks. For instance, Walmart stock fell 15.5% from $120 to $101.55, before rallying 25.5% to new highs near $127.50.
Costco’s Got the Growth
We’re currently enduring a heavy dose of volatility and short-term pain. It’s not often that a bear market comes roaring to life so quickly. But with Costco, the company’s business model offers shelter.
Earlier this month, the retailer delivered earnings of $2.10 per share on revenue of $39.1 billion. This beat expectations by 4 cents and $810 million, respectively, with revenue growing 10.4% year-over-year. Comparable-store sales rose 7.9% vs. expectations of 5.7%, while online sales rose 28%.
Management pointed out an uptick in demand due to the coronavirus (this was on March 5), as February comparable-store sales rose 11.7%. I expect a very strong March figure as a result, and feel comfortable holding onto Costco stock.
The company’s recent acquisition of Innovel Solutions for $1 billion was done in an effort to boost its delivery capabilities and help its e-commerce leg. While Costco is clearly seeing high demand in its at-store purchases, it knows online sales will play a large role in its future. It shows that management is focusing on both its short-term and long-term opportunities.
The Bottom Line on Costco
At one point, hairdressers and bartenders seemed like the “safe” employment play. Recession or not, people would need to get their hair cut and people would still drink. Turns out — at least as far as global pandemics go — grocers are the place to be.
Source: Chart courtesy of StockCharts.com
People always need to eat, and governments recognize that this vital piece of the community cannot shut down.
While a prolonged selloff may reduce the premium valuation for Costco stock, business should remain strong as consumers look for the best deal. Even after paying a membership fee, Costco will often result in longer-term savings.
As a result, dips are an opportunity in Costco stock. So far, we’ve seen this current dip hold the 50-week moving average.
Could shares break below? Of course. It could even fall to the $240 to $250 area if the market selloff gains momentum.
For now though, the stock is holding the $280 level. On a move higher, see if Costco can reclaim the $305 breakout level.
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