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Is Costco Still a Buy After Rising 16% This Year?

By Neil Patel – Aug 12, 2020 at 4:33PM

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A clear winner during the pandemic, this warehouse club operator should be on your shopping list.

Deemed an essential business, Costco Wholesale (COST -0.35%) has been able to keep its doors open and operate during the coronavirus pandemic. The business has performed well over the past few months, as shoppers flocked to its warehouses in order to stock up on necessary products. The value proposition of a Costco membership has seemingly never been stronger, and the stock has followed suit, rising 16% year to date.

Due to what we've experienced this year, my investment philosophy has shifted toward focusing only on companies that are recession-proof. Costco's revenue in July jumped 14.1% from the prior-year period, and e-commerce sales skyrocketed 75.3%. The company posted similar metrics in May and June, showcasing just how resilient the business is.

man pointing at arrow depicting growth

Image source: Getty Images.

Costco's massive size allows it to flex its bargaining power against suppliers, and what I love most is its willingness to share these cost savings with shoppers. This results in an extremely low gross margin between 11% and 12%. "Traditional retail grocers are in the mid- to high-20s and other big boxes are above that and regular retail is way above that," CFO Richard Galanti said on the most recent earnings call. It's not surprising, given Costco generates nearly all of its operating profits from membership fees, which were up 5% in the third quarter of this year.

Happy customers ultimately mean happy shareholders. After its climb this year, Costco's stock sports a P/E ratio of 40. As previously mentioned, shrewd investors must pay up for resilient, high-quality companies, especially in today's economic climate. I think Costco is still a buy and should be held for the long term.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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