The most important metric for this investment is trending in the right direction.
Investors love warehouse chain Costco Wholesale (COST -0.39%), and for good reason. This well-managed business consistently keeps its prices low for its members in spite of inflationary headwinds. And for its efforts, it's rewarded with loyalty from its members and high-margin recurring revenue from its membership fees.
This consistent source of profits allows Costco's management to reward shareholders on a regular basis. One of its preferred methods is paying a growing dividend. It's paid and increased its dividend for 19 straight years, and I expect this streak to continue for decades to come.
But if there's one knock on Costco stock, it's its valuation -- the stock is expensive. At 50 times trailing earnings right now, Costco shares trade at almost a 50% premium to the 10-year average for their valuation, as the chart below shows.
COST PE Ratio data by YCharts
The late great Charlie Munger loved Costco stock, which was one of only three stocks in his personal portfolio. But even he bemoaned its valuation.
What's to like about BJ's stock?
This is why I want to highlight BJ's Wholesale Club (BJ -1.46%) stock. It offers investors many of the exact same benefits of Costco stockbutis a better bargain by a mile.Considering the business model is membership-based, an investment thesis for BJ's Wholesale Club revolves around its ability to gain and retain members.
Since this is the core issue for a BJ's investment, shareholders should be encouraged. When BJ's went public in early 2018, it had more than 5 million paid memberships. Now it has more than 7 million as of the end of its fiscal 2023.
BJ's hasn't just found new members; it's retained old ones as well. The company's renewal rate in 2023 was 90%. For perspective, Costco's renewal rate in its most recent quarter was only marginally better at 93%.
To retain members, both clubs must provide value to their shoppers -- it's the whole reason someone would pay to shop there in the first place. One of the ways BJ's seems to be providing value to its members is through its privately owned brands. In 2017, 19% of its sales came from its own line. But in 2023, the penetration rate was nearly 26%.
Long term, BJ's management believes its privately owned brands can hit 30% of sales. This should provide value for members and consequently spur ongoing high renewal rates.
BJ's isn't only retaining members at existing stores. It's also opening up new locations at a modest pace. As of the end of 2023, it has 244 club locations, and it intends to open 12 new locations this year. For what it's worth, Costco has nearly 900 locations, which suggests that BJ's could grow for quite some time at its current pace.
Under its business model, membership fees are basically pure profit for BJ's. In its fiscal 2023, the company had full-year net income of $524 million. But its membership-fee revenue was $421 million, providing the bulk of this profit. Therefore, simply growing its membership base as it's doing will provide the earnings growth that shareholders need to see.
Should investors buy BJ's stock?
I'm not going as far as to say that BJ's is a better business than Costco -- Costco is undoubtedly among the very best. But BJ's is a good business nonetheless. And its valuation is far more reasonable, which is why I believe it's the better buy.
COST PE Ratio data by YCharts
Warren Buffett says that having a margin of safety is "the cornerstone of investment success." In a nutshell, he means it's important to buy stocks that are undervalued and avoid those that are overvalued.
With Costco stock trading at a 50% premium to its long-term average valuation, I believe that it is easily overvalued today for those looking to start a position. Therefore, I'd say that there's no margin of safety with Costco stock.
By contrast, BJ's stock trades at a reasonable valuation -- perhaps not grossly undervalued, but reasonable. Consequently, I believe it's the safer stock. And I believe that the chance of market-beating returns is much higher given its cheaper starting point.
BJ's still needs to grow its membership base long term -- this is the most important part of the investment thesis, and investors can't get caught up entirely with valuation metrics. But as I've explained, paid memberships at BJ's are trending in the right direction, making it a good buy today.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
FAQs
When compared to other similar retailers, Costco's competitive advantage lies in its own private label, its discount prices, and its membership dues. This has provided customers with a product that they can rely on at low prices. It is also the kind of stable business model that investors seek.
Is Costco stock a good buy? ›
Costco is also cash rich. The company has generated cash flow growth of 14.1%, and is expected to report cash flow expansion of 10.4% in 2024. With solid fundamentals, a good Zacks Rank, and top-tier Growth and VGM Style Scores, COST should be on investors' short lists.
Is Costco a high risk stock? ›
Costco shares are priced at 1.3 times revenue, or about twice the valuation of peers Target and Walmart. Its premium is sitting near an all-time high currently while these competitors are far off of their record levels. That means there's a higher risk that you'll overpay for this highly successful business.
What are the pros of investing in Costco? ›
4 Reasons to Buy Costco Stock Like There's No Tomorrow
- Membership growth and high renewal rates. Costco can sell its products at such low prices and margins because it generates most of its profit from its high-margin membership fees. ...
- Expanding brick-and-mortar presence. ...
- Consistent comps growth. ...
- Stabilizing margins.
Costco Wholesale Corp's (COST) main competitors in the highly competitive retail market of large discount stores are Walmart Inc. (WMT) and Target Corporation (TGT). These companies are also sometimes classified as consumer defensive stocks.
Who is Costco's biggest competitor and why? ›
Walmart. Walmart is one of Costco's leading competitors and alternatives. Founded in 1962, Walmart is a multinational retail corporation that operates a chain of hypermarkets, discount department stores, and grocery stores. With over 10,500 stores worldwide, Walmart is a significant player in the retail industry.
Is Costco a good long-term stock? ›
Costco is also cash rich. The company has generated cash flow growth of 14.1%, and is expected to report cash flow expansion of 10.4% in 2024. With solid fundamentals, a good Zacks Rank, and top-tier Growth and VGM Style Scores, COST should be on investors' short lists.
Is Costco a long-term buy? ›
Costco could be a good long-term buy -- but at its current multiple, investors are paying for a lot of future earnings growth. If you want to hang on to it for decades, then it could still be a good investment for you.
What will Costco stock be worth in 5 years? ›
Costco stock price stood at $743.90
According to the latest long-term forecast, Costco price will hit $900 by the middle of 2025 and then $1000 by the middle of 2026. Costco will rise to $1200 within the year of 2027, $1400 in 2028, $1500 in 2030, $1600 in 2031, $1700 in 2032, $1800 in 2033 and $2000 in 2035.
Why not buy Costco stock? ›
And that's precisely why it's not smart to buy the stock. Yes, Costco has reported strong fundamentals. However, its P/E ratio has also soared by 60% in the past five years. The market continues to bid up the stock, even as the business's growth opportunities become limited over time.
The top individual insider shareholders of Costco are Craig Jelinek, Charles Munger, and Patrick Callans, and the top institutional shareholders are Vanguard Group Inc., BlackRock Inc., and State Street Corp.
Who owns the majority of Costco stock? ›
Costco (COST) Ownership Overview
The ownership structure of Costco (COST) stock is a mix of institutional, retail and individual investors. Approximately 43.37% of the company's stock is owned by Institutional Investors, 0.82% is owned by Insiders and 55.81% is owned by Public Companies and Individual Investors.
Why is Costco a good long term investment? ›
It's a sales and profit-generating machine that works beautifully. But the secret to long-term growth is Costco's expansion opportunities. It only operates 874 stores worldwide, including 602 in the U.S., a much lower count than the traditional or discount supermarket chain. It's aiming to open about 30 a year.
Is Costco really saving you money? ›
Given this particular grocery list, buying in bulk would allow you to save over $1,000 during the course of a year, representing a 33% savings overall over conventional groceries. (In today's economy, it is worth mentioning that you also save gas money with fewer trips to the store.)
What is so special about Costco? ›
Commitment to quality. Costco warehouses carry about 4,000 SKUs (stock keeping units) compared to the 30,000 found at most supermarkets. By carefully choosing products based on quality, price, brand, and features, the company can offer the best value to members.
What makes Costco different from other stores? ›
Commitment to quality. Costco warehouses carry about 4,000 SKUs (stock keeping units) compared to the 30,000 found at most supermarkets. By carefully choosing products based on quality, price, brand, and features, the company can offer the best value to members.
Why is Costco so effective? ›
Membership-Based Model: Costco's primary source of revenue comes from its membership fees. By charging an annual fee for membership, Costco can keep its prices lower on merchandise. Customers are incentivized to return to the store to make the most of their membership investment, thus boosting customer loyalty.
Why do people prefer Costco? ›
“Costco's excellent reputation for customer service and satisfaction has helped them build a loyal following among their affluent clientele,” Anderson said. Among Costco's standout customer service offerings are its free concierge technical support services and generous return policy.
Why Costco is the best store ever? ›
Bottom line. Shopping at Costco is preferable to traditional grocery stores for many people. This is because of its low prices, unique and large selection of products, free samples, and cheap food, all which will help you keep more money in your bank account.
