The Best Stocks for 2010: Costco

As we prepare to ring in the new year, it might pay to ponder stocks that could excel in 2010 and beyond. Amid a sea of struggling, unprofitable, or overly indebted consumer-oriented companies like Borders (Nasdaq: BGP  ) or Crocs (Nasdaq: CROX  ) , Costco (Nasdaq: COST  ) stands out as a golden retailer. That's why it's my nominee for the Best Stock for 2010.

A stock for good times and bad
In 2009, economic difficulties were foremost on many folks' minds. Lots of consumers remained deep in debt, and worse, many found themselves unemployed. Stocks like Nordstrom (NYSE: JWN  ) and Saks suddenly took on an added element of risk, beyond the already high level of retail competition. Without the bubbly excesses of past years to sustain a culture of spending sprees, the pool of potential customers seeking expensive wares at full price dried up. That could remain the case for quite some time.

Costco is a defensive stock because it provides high-quality merchandise at low prices. Stocking up on inexpensive bulk items fits well with a penny-pinching mentality that's bound to continue in 2010. Alongside its industrial-sized jars of mayonnaise, Costco has always been good at offering a scattering of luxury brands at similarly rock-bottom prices. The scavenger-hunt mentality the company fosters -- some items may not be available on shoppers' next trip -- helps encourage customers to grab good stuff dirt cheap while they can. Thanks to its emphasis on low prices and good customer service, Costco is built for resilience in good times and bad.

Management matters
Costco also has strong, exemplary management in CEO Jim Sinegal. He's well-known for his firm belief that happy employees yield happy customers. Costco's workers receive good pay by retail standards, along with excellent benefits.

Meanwhile, Sinegal himself is modestly paid -- a refreshing distinction compared to, say, the CEO of Abercrombie & Fitch (NYSE: ANF  ) , who is exceedingly well-compensated despite his company's recent lack of operational performance. (Last week, I gave 10 reasons why that retailer's been very, very naughty, despite its major run-up this year.)

Sinegal shows a true passion for his career at Costco, doing things many retail CEOs wouldn't consider, including answering his own telephone and touring Costco warehouses around the country. True long-term shareholders should want a CEO like Sinegal on their team.

Quality for 2010
Granted, Costco trades at a premium to comparable big-box discounters like Target (NYSE: TGT  ) and Wal-Mart Stores (NYSE: WMT  ) . It changes hands at more than 24 times trailing earnings, compared to Wal-Mart's 16 and Target's P/E of 17.

However, as pricey as Costco shares may seem at the moment, I'd argue that a premium price is justifiable for stock in a high-quality company that you intend to hold for the long term. Costco is certainly one of Wall Street's best, given its great management and its emphasis on customer service. Our CAPS community gives Costco an impressive four-star rating, and I'll bet most of us know at least one rabidly loyal Costco customer. Last but not least, Costco has a dividend yield of 1.2% to sweeten the deal for investors.

In these trying times, I'd rather invest in high-quality companies that do things right, rather than seemingly "cheap" companies that do a heck of a lot of things wrong. There are many ways to become a terrible investor; ignoring a company's quality seems like one of them to me.  

Now it's time for you to make your voice heard. Vote in the poll below, and let us know whether you think Costco's the best stock for 2010.

Which is the best stock for 2010? See all 13 candidates here.

Costco is a Motley Fool Stock Advisor pick. Costco and Wal-Mart are Inside Value selections. The Fool owns shares of Costco and has a bear put spread on Abercrombie & Fitch. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2009, at 1:15 PM, EditorJim wrote:

    Very appropriate that Costco was contrasted with Borders at the head of this article, especially given the comment about CEO Jim Sinegal believing that happy employees lead to happy customers. Borders has so crushed employee morale in the past year with unrealistic performance expectations and no management support, that it has damaged customer service, which has directly affected sales and the bottom line. With the very stiff competition, it's unlikely that Borders will ever recover the resultant lost market share, and I'm expecting a significant number of superstore closures in the next FY.

  • Report this Comment On December 30, 2009, at 6:12 PM, jm7700229 wrote:

    COST amazes me as a business. I hate crowds and lines and my vision of a Costco store was very close to my vision of hell. Surprise! Wide aisles, brightly lit and full of color. FAST movement of the checkout lines. Smiling faces doing the checking and packing. Courtesy from everyone!!

    I bought in when the price was more attractive than it is now. I don't think there is any competition on the horizon, so the valuation is probably justified; nevertheless, I will look for a dip before I go in any further. I look for them to do well, but not to be hitting the really long ball this year.

    Longer term, I think a lot of higher income people like me have gotten hooked on the predictable quality and super prices (I go every week just to buy produce). This is one for the nest egg.

  • Report this Comment On December 31, 2009, at 11:09 AM, escott7 wrote:

    I am continually perplexed by Motley's insistence that Crocs is an indebted failure. Last I checked, the company is making money and is out of debt. While you have bashed the stock for the past year, it has climbed 400%. Fools indeed.

  • Report this Comment On January 01, 2010, at 11:56 AM, mbigger wrote:

    Alice, I think you have no clue about Crocs. Escottt7 is right. Funny, that Crocs Cayman are again the best selling shoe on Amazon.com in 2009. Have you looked into the Spring and Summer 2010 Crocs prebooking metrics?

    Michael Bigger

    biggercapital.com/blog

  • Report this Comment On January 03, 2010, at 3:45 PM, TMFTypeoh wrote:

    Long term winner, but may underperform next year gift its lofty multiple.

  • Report this Comment On January 04, 2010, at 4:35 PM, Ironbob wrote:

    Costco is a tough pick for 2010 but it's not a cautious pick. To be honest, the one store that my family can't get enough of was mentioned in this article--Target. More than Walmart and especially more than Costco.

    The problem I have with Costco is their membership charge. $50 is way too much and so sorry but it will take me a lot of buying for me to make that $50 back over shopping at Target where on many items they are less expensive then Costco.

    Costco P/E is 25 compared to 16 for Target. Which store is easier to expand? That's too simple of a question. Target has been able to build at upscale malls as well as strip malls and they are indeed a VERY GOOD anchor store.

    Walmart's stock has been in permanent stagnation the past year, where as Target has appreciated 40% since April.

    Bear in mind that Target most likely will start moving into the produce and meat market although that may be a little tricky given the refrigeration and cleanliness issues that come with such ventures but this company continues to defy all the odds.

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