The late, great Charlie Munger has a lot of good things to say about retailer Costco (NASDAQ:COST), which seems to check every box for what makes a truly wonderful business. He described himself as a “total addict” when it came to Costco runs, and it’s not hard to see why. Costco puts its customers first, and until they change their ways, they’ll probably continue to be one of the go-to destinations for consumers who want to get the best deals around.
Though the window of opportunity to buy Costco at a discount tends to close fast, I do think that the name could be a worthy buy (perhaps in bulk!) at north of $1,000 per share while it’s fresh off its quarterly earnings. Indeed, if there’s a big-name blue chip that could use a stock split, it’s Costco. And while we may have to wait a while before we get that split, I think it doesn’t make a lot of sense to stay sidelined as the well-run retail juggernaut and king of low-cost bulk buys looks to keep gaining in an incredibly uncertain market environment, one that is likely to continue favoring the firms that provide the highest-quality goods at the lowest prices.
So, just as you’d keep your pantry stocked up with the finest Kirkland Signature snacks, I think keeping a bit of Costco in your portfolio could prove wise once the economic tides turn south.
Key Points
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Costco stock was a Charlie Munger favorite. And it’s been faring quite well in recent years, to say the least.
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Costco stock isn’t cheap after its mild earnings beat. But it shouldn’t be cheap, given its powerful growth engine and durable competitive edges.
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A trusted brand, a customer-centric business model, and a stellar management team
Costco has fought hard to get the best deals for its members. It’s been done so for so long, through the pandemic and the inflation that followed, all while keeping that $1.50 hot dog deal on the menu.
I guess you could say Costco’s brand affinity has been built through many decades of treating its members like royalty. It’s almost as though Costco shoppers would gladly load up their shopping carts without having to look at the price because they know they’re getting a great deal at Costco on just about everything. Indeed, few retailers can match Costco’s ability to offer low prices. In any case, Munger previously emphasized the high degree of trust in the brand as one of its major competitive advantages in retail. And he’s absolutely spot on.
The results really speak for themselves, with COST stock up 237% in the last five years. It’s been a steady ride higher for investors, and while the sticker price on the stock is still on the high end (57.13 times trailing price-to-earnings (P/E)), Costco’s growth story, I believe, makes the growthy multiple worth paying. Sales have grown for five straight months. And while inflation has come down quite a bit, there doesn’t seem to be any willingness to shop elsewhere.
Not while Costco continues serving up bargains at its packed warehouse stores. As the company expands its global footprint, sales growth is bound to move higher in a predictable fashion. Indeed, it’s hard to envision a Costco that’s anything less than packed. As the firm places bets on better handling higher foot traffic, I think the stock looks quite cheap, as consumers look to offset tariff price hikes with Costco deals. I think we’ve entered an era where many American consumers can’t afford not to have a Costco membership.
The slight dip could be a buying opportunity as investors digest earnings
With the stock slipping just over 6% from its highs, I think now’s a great time to buy a share or more if you’ve got enough dry powder on the sidelines. Though I wouldn’t load up my Costco cart just yet, I do think initiating a starter position makes sense as the firm looks to grow rather predictably in yet another uncertain year for the economy.
For the third quarter, Costco saw sales rise 8% year over year while topping analyst estimates on the bottom line. As you’d expect, membership growth stayed solid, gaining around 7%, while renewal rates stayed above 90%. As the firm expands its warehouse footprint, look for the growth story to keep playing out. Also, I’d keep tabs on the e-commerce growth as the firm looks to beef up its digital presence in a big-time way. Perhaps Costco is evolving into the “absolute titan on the internet” that Munger envisioned a few years ago.
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