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Will Costco Beat the Market in 2021?

By Rick Munarriz - Jan 7, 2021 at 10:20AM

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The warehouse club operator's share price gain was well ahead of the S&P 500's in 2020, but conditions this year will be a bit different.

Owning shares of Costco Wholesale ( COST 0.59% ) turned out pretty well for investors last year. The leading warehouse club operator delivered a 33% return in 2020, significantly besting the S&P 500's 18% gain.

It's easy to see why Costco beat the market. It has stepped up during the pandemic, expanding on its position as a popular place for shoppers to stock up on groceries and other essentials in bulk. But at this stage in the crisis, most large retailers are back to being fully open, and the healthcare system has begun to distribute a pair of effective COVID-19 vaccines. With more chains now vying for attention, and additional vaccines likely to reach the market, will Costco be able to deliver another standout performance in the year ahead?

Exterior of a Costco Wholesale club.

Image source: Costco Wholesale.

A good start

Costco posted its latest financial update after Wednesday's market close. For the five-week period ending Jan. 3, its net sales clocked in at $19.14 billion. That was a 12.3% increase over the prior year's retail month of December, and it was fueled primarily by store-level improvement. Comps rose 10.7% worldwide -- and by slightly more than that if you factor out the impact of volatile gasoline sales and foreign currency shifts. 

Double-digit growth is a good thing for any retailer, but Costco investors have been spoiled lately. December was the seventh consecutive month of fuel-adjusted comps north of 10%, and this result was actually a deceleration from its earlier pace. 

Costco will be just fine, but last month was one time when the impacts of the pandemic worked against the warehouse club operator. With vast swaths of the population opting for smaller holiday gatherings or celebrating only with immediate family, expenditures were likely lower than usual on the fixings for large feasts and extended gift exchanges. Given that, the chain's growth rate -- while it was the lowest since the first half of last year -- was still impressive. 

For companies that were well-positioned to meet the nation's needs in this type of crisis, the pandemic has been a near-term boost. But it also gave many of them a chance to improve themselves for the long run. Costco leaned into the trends by taking the opportunity to beef up its e-commerce business. And year over year, e-commerce comps soared by 62.5% last month. 

Costco's membership model has stood the test of time. The company has excelled at the art of balancing low prices with well-compensated employees, creating a business environment where both shoppers and workers come away satisfied. 

Income investors may not be wowed by the chain's dividend, which at current stock prices yields just 0.7%, but Costco also peppers its shareholders with special dividends every now and then. It shelled out a $10-per-share special dividend last month. Factor that into the equation and its yield over the last year would be north of 3%. 

Costco is a well-positioned retail company with a sticky business model. Further, it's an all-weather winner. If the market starts to buckle again -- and no one should be surprised if that happens at some point in 2021 -- Costco shares will benefit as it's a "flight to quality" stock. Either way, investors can count on steady results from Costco, and that should be more than enough to allow it to deliver market-thumping returns in the year ahead.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$528.62 (0.59%) $3.11

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