Relative to other growth stocks, Costco (NASDAQ:COST) shares have held up relatively well so far this year. But in recent days, the uncertainty that has hit tech and growth stocks hard in 2022 has had an impact on COST stock.
Trading for as much as $612.27 per share earlier this month, it has experienced a sharp-yet-moderate slide over the past few weeks. To some, this may be a sign to stay away. Yet if you are familiar with the discount retailer’s current situation, you’ll know full well the market is overreacting, with its big shift in sentiment.
That is, while the external factors affecting growth stocks today could result in disappointing results for many growth names in the quarters ahead, I wouldn’t say that’s going to be the case here. Therefore, you should view this latest round of weakness as a buying opportunity.
The Latest With COST Stock
As mentioned, Costco shares have been affected by market volatility. Rising concerns about an economic slowdown, and the Federal Reserve’s increasingly hawkish response to inflation, have clobbered growth stocks.
Fortunately, COST stock hasn’t been hammered as badly as some other popular growth names. For instance, many FAANG stocks have seen far sharper drops in price throughout April. By comparison, the pullback this stock has experienced is more of a dip than a plunge. Nevertheless, I can see why you may still be concerned. One of the key drivers of the volatility we’re seeing today (fears of an economic slowdown) sounds like something that’s bad for its business, doesn’t it?
Not necessarily. Admittedly, many growth names may experience some challenges over the next twelve months. These could either be more inflationary pressures, and/or slowing economic growth caused by the Fed’s response to inflation (rate hikes, monetary tightening). Keep in mind, though, that this may not happen with Costco.
Why? Unlike some other companies that have seen their growth take off during the post-pandemic economic boom, Costco’s growth could carry on, even if the times get tougher. It all has to do with the nature of its business.
Thriving Amid the Belt-Tightening
A key reason behind the strong long-term performance of COST stock has been the uncanny ability of its business to thrive, even during what you may consider bad times. We’ve seen it play out during challenging times in the past decades. We even saw it in play during the early days of the pandemic.
Just like in the past, Costco is thriving, even as U.S. households are forced to tighten their belts due to spikes in energy and food prices. That’s no surprise. Like I discussed earlier this month, this belt tightening actually works in Costco’s favor.
This is clear from its March sales numbers. Same-store sales for the month were up 18.7% year-over-year. Sure, critics of this stock may counter that rising sales (which you can chalk up to inflation) is one thing, but margins are another. We won’t know for sure until it releases results for its fiscal third quarter (ending May 31) a few months from now.
Yet I wouldn’t quickly jump to the conclusion that soaring costs mean lower margins. At least, based on the numbers it reported last quarter.
The Best Move Today With COST Stock
For the quarter ending Feb. 13, 2022, Costco reported 16.1% year-over-year sales growth, and 36% year-over-year earnings growth. Granted, this big jump in earnings was due partially to a one-time pandemic-related labor cost in the prior year’s quarter.
Still, even when accounting for this, earnings were up in-line with sales growth. It’s hard to say that it’s facing severe inflationary pressures in terms of operating costs. Clearly, it has been able to pass along rising product prices to the consumer, all while maintaining elevated sales growth. Expect this to continue in the quarters ahead.
Earning an “A” rating in my Portfolio Grader, investors are letting worries get the better of them when it comes to this stock. As it keeps thriving amid the challenges, in time many of those cashing out of it today may wind up diving back in.
With that in mind, consider now the right time to buy COST stock.
— Louis Navellier and the InvestorPlace Research Staff
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Source: Investor Place