Recession concerns were in the spotlight as investors awaited Fed Chair Jerome Powell’s two-day Congressional testimony, kicking off today. Stocks sank in early trading, giving back some of yesterday’s gains after Goldman Sachs warned clients that the risks of a recession are “higher and more front-loaded.”
“The main reasons our baseline growth path is now lower is that we are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply,” the firm said in the note.
With recession fears escalating, many investors are seeking companies from defensive industries that have a reputation for being resilient during times of economic weakness. Today we’re highlighting one such company. Moreover, this consumer staples mega-cap has a 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.
Inflation is at a 40-year high, and 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 18%, outperforming its retail peers, evidenced by the performance of the SPDR S&P Retail ETF (XRT), which has dropped 36% 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 annual 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 32x 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. Last month 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.
Should you invest in Costco right now?
Before you consider buying Costco, you'll want to see this.
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And it's not Costco.
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But you have to act now, because a catalyst coming in a few weeks is set to take this company mainstream... And by then, it could be too late.
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