Daily Stock Pick: August 23rd, 2022

Stocks seemed to be looking for a direction in early trading in the wake of yesterday’s downbeat session as the summer rally continues to fade amid concerns of a slowing economy. Later this week, we’ll get a clearer picture of whether inflation has peaked and how consumers are reacting to higher prices with the latest readings of the Personal Consumption Expenditures Price Index (PCE) and the University of Michigan’s Consumer Sentiment Index (MCSI).  

Recent data showed that more than sixty percent of the U.S. population are buying only the essentials as the prices of many goods and services continue to skyrocket. Today we’re highlighting a retailer that Wall Street calls “absolutely essential” as inflation forces consumers to tighten their belts.   What sets this consumer staples mega-cap ahead of its peers is its winning business model that will likely help the company flourish when the market begins to recover and tremendous cash flow to help sustain the business through rough patches. 

With inflation at 40-year highs, many consumers are looking for ways to save on everyday essentials. Membership-only big-box retail giant Costco (COST) is the go-to when consumers want to buy in bulk. Over the past year, COST share price has gained 20%, outperforming its retail peers, evidenced by the performance of the SPDR S&P Retail ETF (XRT), which has dropped 30% over the same period.  

The company also has tremendously reliable cash flow compared with other retailers, with some 67 million paid Costco memberships at roughly $60 per pop in annual dues. COST also enjoys a robust $4 billion in yearly sales rolling in simply from renewals. Costco currently boasts a 92% renewal rate for its 114.8 million-and-growing base of cardholders. In the latest quarter, the company sustained strong 16% sales growth and grew net income by 37%. Same-store sales of 14.4% were impressive, especially as the company lapped its stellar pandemic performance.

At 39x forward earnings, COST price may still be high, but considering the upside potential based on projected membership cost increases, the high cost could prove well worth it.   Costco has a history of raising membership fees every five to six years. The last fee increase was in June 2017. In May, the company confirmed that it does not have plans to increase its membership fee right now, given the current macro environment. However, investors will likely enjoy a boost from higher membership fees in the not-too-distant future.  

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