One of the best mutual fund managers in history, Peter Lynch, had a saying: "Invest in what you know." This means that you should apply your natural advantages and observations in the real world to the stock market.
Costco Wholesale (COST +0.56%) is a textbook example of this grassroots approach in practice, even in today's tech-driven market.
Costco has been a gem hiding in plain sight -- something anyone could recognize as a great business after a little bit of research and firsthand accounts. Costco's stock price and earnings have increased several-fold because the business model has resonated with consumers. This has allowed the company to expand rapidly across North America while still adhering to its core principles of passing along value to customers through low merchandise margins and affordable memberships.
Despite Costco's long-term track record of outperforming the S&P 500 (^GSPC +0.46%), 2025 is on track to be Costco's worst year relative to the index in over two decades. The stock is down 6.5% year to date at the time of this writing, compared to a 15.3% gain for the index.
The sell-off may look like a compelling opportunity to scoop up shares of this longtime winner. But there's an even better retail stock to buy for 2026.
Image source: Amazon.
Costco and Amazon share many similarities
Costco shoppers can be confident that they are getting great deals on merchandise and services, because Costco doesn't price-gouge, and it values customer loyalty. Like Costco, Amazon (AMZN +1.63%) has an elite supply chain that allows it to pass value along to customers. Similar to Costco, Amazon's Prime membership model generates a recurring revenue stream, enabling the company to offer competitive prices.
In Costco's most recent quarter, the company generated $2.46 billion in operating income from $67.31 billion in revenue, including membership fees, which is a 3.7% operating margin.
In Amazon's most recent quarter, the company raked in $147.16 billion in revenue from online and physical stores, advertising, subscription services, third-party fees (like commission, fulfillment, and shipping), and other. Amazon earned $5.99 billion in operating income on those sales, which is an operating margin of 4.1%. Keep in mind that this doesn't even include the company's Amazon Web Services (AWS) cloud computing business.
Amazon's non-AWS business is similar to Costco, just more than twice as large. AWS is Amazon's high-margin cash cow, earning roughly twice as much operating income in Amazon's third-quarter 2025 as the rest of the business combined, even though AWS' net sales are less than a quarter of the rest of the business.
NASDAQ: COST
Key Data Points
Amazon is a better value than Costco
Given their similar margins and recurring revenue from subscriptions, Amazon would deserve to be valued similarly to Costco if it were just the non-AWS component. But AWS adds a massive growth story to Amazon's investment thesis. And yet, Amazon trades at just 32.2 times forward earnings, compared to 42.4 for Costco.
Costco is a phenomenal company, but the stock price has risen faster than its earnings growth, making it too expensive even after the recent sell-off. Amazon is a much better value and has more growth potential.
