Lately, I've heard some of my investor-savvy friends talk about buying gold in response to their fears of inflation. As an investor with a small amount of money in the market and in cash, the cost of purchasing and storing actual gold simply isn't feasible for me.
Yes, I know I could buy into a bullion proxy like streetTRACKS Gold Shares (NYSE: GLD ) or a gold-mining exchange-traded fund like Market Vectors Gold Miners ETF (NYSE: GDX ) . But honestly, I'd like to find something even better.
Fortunately, I've discovered what I think would make a viable gold alternative: shares of Costco (Nasdaq: COST ) . It has a steadily rising dividend -- which happens to be a great way to hedge against inflation -- and a business model that sets it apart in tough economic times.
The background
In a nutshell, I believe Costco has the strength to thrive in recessionary times, and owning the stock should give investors the same feeling of safety that many get from owning gold.
Costco's management team is committed to a simple strategy: purchasing strictly high-quality products that can be acquired at low prices, and then passing these savings along to the consumer. As Fool analyst Rich Greifner points out, this isn't a sexy strategy, and you won't find the high profit margins you'd get with higher-end retailers. But the strategy does keep customers happy, spending money, and coming back -- to the tune of nearly $71 billion in sales during its 2008 fiscal year.
Moreover, these customers truly consider themselves to be members, renewing their memberships at an astounding 87% rate and forking over $1.5 billion in high-margin membership fees. Can you say "moat"?
Threats and responses
Some investors will be scared off by Costco's potential weaknesses: cutthroat competition from the likes of Wal-Mart (NYSE: WMT ) , BJ's Wholesale (NYSE: BJ ) , and Sam's Club, as well as Costco's reliance on getting great pricing from merchandisers.
I believe these weaknesses are more than compensated for by Costco's customer-friendly strategy, in combination with its methodical geographic expansion. Costco currently operates 555 stores in seven countries. Management has consistently increased store counts by 20 to 30 per year over the past few years and is determined not to make the same overexpansion mistakes we've seen plague companies like Starbucks (Nasdaq: SBUX ) and Gap (NYSE: GPS ) .
As good as gold?
The very thought of gold conjures up images of safety and security. And today, with the threat of inflation looming, it seems like a natural hedge. But with its stable, customer-friendly business model, growing dividend, and smart management, Costco may just be better than gold.
For related Foolishness:
RSS Headlines
Fool UK