Wall Street likes to overcomplicate the search for life-changing investments. If you only try to follow the get-rich-quick prescriptions, you'll likely waste time researching obscure technologies or hunting for unknown companies that may or may not be on the cusp of revolutionizing some industry.
Yet there are really two ingredients you need in a hit investment. Just find a business with an enduring competitive advantage, and hold on to the stock for long enough to let those returns compound into something great.
The best part about this approach is that it doesn't require you to discover and hold a tiny, volatile stock that might crash at any time. If it's a proven market share leader like Costco Wholesale (COST 0.50%), your odds of success go up even though the retailer is already a well-known commodity on Wall Street.
Let's take a closer look.
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A powerful operating model
Costco's streak of market-beating growth extended through the retailing disruption that characterized most of 2020. Comparable-store sales gains sped up to 9% in the fiscal year that ended in late August, from a 6% gain in the prior year. That growth would have been closer to 10%, too, if you account for the slumping demand for gasoline.
Many retailers saw a demand spike in this period, but with Costco you don't have to be as concerned about sales gains crashing right back down once the COVID-19 threat disappears. The company sells a wide range of essentials and discretionary products. It generates most of its earnings from subscription fees, too, which makes it more of a club then a traditional retailer like Target (TGT 0.50%), whose profits rise and fall with shifting economic trends.
Risks and drawbacks
The biggest drawback to the stock is that it is hardly ever available at a big discount. To purchase Costco shares today, you have to pay almost 1 times sales compared to cheaper P/S ratios for Kroger (KR +0.67%) and Walmart (WMT 0.70%). Each of those stocks promises a heftier dividend yield, too.
COST PS Ratio data by YCharts.
Meanwhile, Costco's biggest competitive advantage (its laser focus on keeping prices low) can depress investor returns over the short term. Even in boom times, the company resists allowing its profitability to rise, in contrast with companies like Target, which has rewarded shareholders with improving gross profit margins in recent quarters.
A worthwhile premium
However, these drawbacks have been attached to Costco stock for many years, and it has still delivered solid returns to investors. The stock beat the market over the last 5-year and 10-year periods even though it was already widely acknowledged as a dominant retailing force.
That suggests you have a good shot at congratulating yourself in a decade or two when looking back at a Costco purchase you made in early 2021. Yes, the stock seems expensive compared to peers, as it almost always does. But game-changing investments only require modest (but sustainable) competitive advantages to support big returns over long time frames.
And the longer you hold an investment, the less crucial your initial starting price is to your returns. Costco offers that rare combination of steady market share growth in a massive global industry. Those assets should translate into impressive returns for investors who simply hold on to the stock for a period of many years.
