Stock Analysis & Ideas

Costco Stock: The Tactical Operator Against Inflation

Story Highlights

With high inflation hurting American consumers, warehouse-retailing giant Costco Wholesale could be a cynical winner because it essentially encourages bulk purchases, one of the most effective tactical measures to mitigate rising costs.

Thanks to an ugly combination of geopolitical tensions, supply-chain disruptions, and monetary policies that may have been overly dovish in the past, inflation is now the top concern among a majority of Americans surveyed by Pew Research Center.

However, this broadly unfortunate circumstance could be a cynical tailwind for warehouse retailer Costco Wholesale (COST). I am bullish on COST stock.

Fundamentally speaking, American households may be the most privileged consumer base in the world. For the most part, the vast might of its military-industrial complex keeps hot conflicts far away from its borders, thereby giving rise to plausible deniability.

Few Americans are so ignorant that they don’t recognize deep fissures in geopolitics. However, the ability to sleep easy at night tends to foster complacency.

What makes the current inflationary condition so problematic for Washington’s policymakers is that the real pain and sacrifices involved have completely eroded the aforementioned plausible deniability.

Unless the Biden administration and the ruling Democrats impart meaningful mitigation measures, logical deduction suggests that a reckoning could be had when mid-term elections come.

Down to the consumer level, though, average everyday households have few options. Sure, multiple financial publications suggest that investors should consider reliable dividend-paying stocks or even gold for wealth preservation. The challenge with either of these asset classes is that they’re both subject to market risk. Right now, the market is a risky place indeed.

However, COST stock could be a company that is distinctly geared for the current inflationary crisis.

Costco’s Smart Score Suggests Outperformance

On TipRanks, COST stock sports a ‘Perfect 10’ Smart Score rating. This indicates strong potential for the stock to outperform the broader market.

COST Stock and the Bulk Purchasing Effect

Though the bulk of financial publications appears to focus on “strategically” beating inflation, this may be the wrong approach. Unfortunately, strategic planning is incredibly difficult to get right.

For instance, you might reasonably assume that the Federal Reserve might raise interest rates substantially to combat rising prices, which would then imply greater profitability for financial institutions.

However, higher borrowing costs hurt incentives to build or expand businesses, thus sparking an economic slowdown or maybe a recession. In other words, inflation-mitigating strategies become increasingly complex (and prone to error) the longer the underlying timeline is extended.

On the other hand, “tactical” measures against inflation are much more effective. If you’re anticipating higher consumer prices in the next month, quarter, or even year, that’s a much more viable framework. Here, Costco is essentially the tactical operator against pesky inflationary pressures, as the underlying business model encourages bulk purchases.

Of course, not every item at Costco can be effectively purchased at scale. However, for products that families use anyways – toothpaste, household cleaners, toilet paper, even flash memory cards – consumers can buy in bulk today to save against likely cost surges tomorrow.

It’s not just empty musings. In Costco’s most recent quarter ending May 31, 2022, it generated $52.6 billion in revenue, up 16% on a year-over-year basis.

Costco and the Income Factor

Another factor to consider for COST stock is income and the broader socioeconomic implications of the underlying business. One of the main catalysts for Costco’s long-term success is that it caters to an affluent customer base.

Per the latest reports, the average profile of a Costco member is a married 39-year-old Asian American woman who earns $125,000. That’s just average, meaning that there are quite a few Costco shoppers who rake in significantly more money.

In contrast, compare this profile to that of the average Walmart (WMT) shopper, who is a married white 59-year-old woman earning $80,000 a year.

Although both Costco and Walmart shoppers generally make more money than the median U.S. household income of nearly $70,000, the former features an impressive 56% gap over the latter in terms of shopper purchasing power. Over time, that’s likely going to play a huge positive influence on COST stock.

In addition, the Bureau of Labor Statistics reports that peak earning power occurs between the ages of 35 and 54. Therefore, the average Costco shopper is priming for maximum expenditures while the average Walmart shopper will be fading spending.

Stated differently, COST stock is better positioned for economic insulation – whether the U.S. encounters higher inflation or a debilitating recession.

Wall Street’s Take on COST Stock

Turning to Wall Street, COST is a Strong Buy based on 16 Buys, three Holds, and no sell ratings. The average Costco Wholesale price target is $568.67, implying 14.9% upside potential.

Conclusion – Moving Where the Money Is

Even with Costco’s contextually-superior business model, COST stock is not a slam-dunk opportunity. Certainly, a catastrophe like the 2008 financial crisis would be problematic for virtually every publicly-traded security.

However, it’s also fair to point out that American society has become bifurcated, with the top 1% of society now owning almost 32% of net worth in this country. It’s the same old story: the rich get richer, and the poor get poorer.

While individual investors can’t overcome these drastic social inequities, they can cynically protect themselves by moving where the money is.

Disclosure

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