Last year, the benchmark S&P 500 tumbled into a bear market as recession fears weighed on investor sentiment. The index is still down 14% from its high, but investors should view that drawdown as a buying opportunity. Every bear market has eventually ended in a new bull market, and the S&P 500 has never failed to recoup its losses.
With that in mind, Intuit (INTU -1.43%) and Costco Wholesale (COST -0.12%) have both outperformed the market over the last three, five, and 10 years, and investors have good reason to believe that trend will continue. Here's why both blue chip stocks are worth buying.
1. Intuit
Intuit provides financial software and services to consumers and small businesses. The company is best known for TurboTax and QuickBooks, the gold standard in U.S. tax preparation and accounting software, respectively. Intuit holds more than a 70% market share in both categories, and the essential nature of those products makes the company somewhat resilient to economic cycles.
Intuit showcased that resilience in the second quarter of fiscal 2023 (ended Jan. 31, 2023) with solid financial results amid a challenging economic climate. Revenue rose 14% to $3 billion, and non-GAAP (adjusted) earnings climbed 42% to $2.20 per diluted share. Investors can expect that momentum to continue for many years, as Intuit has plenty of room to grow its business.
Management says TurboTax and QuickBooks address an $81 billion market, and the company is working to monetize both products more effectively by providing access to live advice from tax professionals (TurboTax Live) and accounting professionals (QuickBooks Live). Those efforts continued to pay off in fiscal 2022 (ended July 31, 2022). TurboTax Live revenue increased by 30%, and QuickBooks Live customers increased by 55%.
Intuit also wants to deepen its customer relationships with adjacent software and services. For instance, the company provides payment processing, payroll, and marketing solutions to small businesses on its QuickBooks platform, and it connects consumers with loans, credit cards, and insurance through Credit Karma. Those adjacent offerings bring its addressable market to $253 billion.
Shares currently trade at 31.3 times free cash flow (FCF), a discount from the three-year average of 39.5 times FCF. That's why this growth stock is worth buying today.
2. Costco Wholesale
Global retail sales are expected to increase at 4% annually through 2026, according to eMarketer. But membership-based retailer Costco should easily outpace the broader industry due to its scale and operating expertise, both of which have contributed to its reputation for quality goods at bargain prices.
Costco is the third-largest retailer in the world, meaning the company has significant purchasing power, and it further concentrates that cost advantage by carrying just 4,000 stock keeping units (SKUs) on its shelves. For context, most supermarkets carry about 30,000 SKUs, and Walmart actually carries 140,000 SKUs. So what? Costco forces brands to compete on price for limited shelf space by keeping its SKU count low, and it can pass those savings on to consumers.
Costco also utilizes its warehouse space more efficiently than many peers. Research company Trefis estimates Costco will earn $1,600 in U.S. revenue per square foot this year, but it expects Walmart and Target to earn just $616 and $469, respectively.
Despite operating in a difficult economic environment, Costco delivered reasonably strong financial results in the second quarter of fiscal 2023 (ended Feb. 12, 2023). Revenue increased 6% to $55.2 billion, and earnings climbed 13% to $3.30 per diluted share. The driving force behind that growth was a 5% increase in store traffic and, to a lesser extent, a 0.2% increase in average ticket price.
The near-term outlook for Costco (and the broader retail industry) is uncertain. Retail sales in the U.S. decelerated in the first three months of the year, and they may not reaccelerate to any meaningful degree until economic headwinds ease and consumer sentiment improves. That means Costco could report weak growth in the coming quarters. But patient investors can still buy a small position in this stock today. Shares currently trade at 41.5 times FCF, in line with the three-year average of 40.9 times FCF, and Costco has proven itself a very capable operator. Investors can expect consistent growth as the company adds more members, opens new warehouses, and scales its e-commerce business.
But there is one more reason to own the stock. Costco recently increased its quarterly dividend by 13% to $1.02 per share, and it has consistently raised the payout by 13% annually since 2004. The dividend yield currently sits at 0.80%, a small figure compared to other dividend-paying stocks. But Costco's operating excellence means shareholders can count on regular dividend hikes in the years ahead.
