Choosing to invest in the stock market is one of the best financial decisions people can make. While it may seem like an intimidating endeavor at first, it is actually not that complicated. The goal to building lasting wealth is to concentrate exclusively on great businesses and to plan on holding them for at least the next five years -- and ideally much longer. This course of action increases the chances of producing outstanding returns.
Taking care of customers
For a company to make a good investment, it must first focus on its customers. And Costco excels in this regard. The warehouse chain is known for having the lowest prices around for a wide assortment of products, ranging from groceries and electronics to furniture and appliances. The average mark-up at Costco is 11%, while it can be substantially higher at other major retailers.
Because of its massive scale, with trailing 12-month revenue of $218 billion, Costco is able to flex its tremendous bargaining power with suppliers to get favorable pricing on merchandise. And these savings are immediately passed on to customers in the form of lower prices.
Costco is able to build loyalty because in order to shop at one of its 836 warehouses, a membership is required. In the most recent quarter (ended May 8), the membership renewal rate in the U.S. and Canada was a superb 92.3%, demonstrating that consumers see the value in being a member.
Additionally, Costco is known to take good care of its employees. The company provides great wages and benefits, like health insurance and a 401(k) plan, even to part-time workers. And according to Glassdoor, Costco has a four-star rating (out of five), with 85% of employees approving of the CEO, Craig Jelinek. Happy employees definitely make the shopping experience better for customers.
A long history of success
Since its initial public offering (IPO) in 1985, Costco shares have risen an astonishing 46,000%, which crushes the total return of the S&P 500 index. Steadily opening more warehouses, particularly in international markets, has supported the company's expansion over the years. And between fiscal 2011 and 2021, Costco's sales and earnings per share have climbed at a compound annual growth rate of 8.2% and 13.1%, respectively.
Costco's remarkable success has been on full display over the past couple of years. The coronavirus pandemic boosted prospects, as consumers flocked to warehouses to complete all of their essential shopping needs. And in the soaring inflationary environment the U.S. has been seeing over the past several months, Costco's low prices are a huge relief for budget-stretched households.
What makes Costco attractive from an investing perspective, especially in light of the growing popularity of growth tech stocks, is that its business model doesn't invite much in the way of disruption. Costco has been doing the same thing for decades, and an easy argument can be made that it will still be selling high-quality merchandise at low costs many, many years from now. This durability and sustainability are features that make it a great investment candidate.
What about the valuation?
Costco's longtime success hasn't gone unnoticed; investors are all too familiar with the quality of the business. Even with the stock down just under 4% in 2022 (as of Aug. 15), it still trades hands at an expensive price-to-earnings (P/E) ratio of 43, which is far greater than the trailing five-year average of 35. Costco's valuation is also significantly more expensive than rivals Walmart and BJ's Wholesale Club.
For those investors who aren't too worried about Costco's valuation and who actually possess a truly long-term mindset, the stock could be a buy right now. The reasoning could be that the company deserves its premium valuation based on its value proposition for consumers and its proven business model.
But for those who are a little more conscious of the price they're willing to pay, particularly in today's rising-rate economic environment that is full of uncertainty, then it's not a bad idea to put Costco on your watch list for now and wait for a pullback. The stock did fall 32% between early April and late May, so a price dip isn't completely out of the question.
Nonetheless, it would be a difficult task to find a business and stock better than Costco that investors can buy, forget about, and own far into the future.