>COST) is on a winning streak. Costco stock recently hit new all-time highs, and now shares are up 15% year-to-date and 24% over the past 12 months.
© Provided by InvestorPlace A Costco Wholesale (COST) warehouse in Auburn Hills, Michigan.
That makes sense, as Costco has delivered stellar earnings. Customers have turned to the retailer to stock up in the face of the novel coronavirus.
Grocery stores in general have had a great run in 2020. It’s not just Costco zooming up.
>KR) are all near their 52-week highs as well.
In a year where so much of the economy has shut down, retailers that provide essential services have been indispensable. However, even in a great year for grocery, Costco has stood out.
Here’s what you need to know.
Earnings Its Membership Dues
Costco has strengthened its competitive position this year. Its membership model tends to create a very sticky client base. Globally, nearly 90% of Costco shoppers choose to renew their paid memberships every year. One of
>AMZN) competitive strengths is the Prime program. Once people pay for access, they tend to order more through the site than they would have otherwise.
Similarly, Costco has created fantastic customer lock-in with its pay-to-shop system. The membership creates the feeling of exclusivity.
In 2020, this has been more important than ever. Folks want a simple in-and-out reliable shopping experience in these trying times. Costco’s large format stores with a limited number of different products means that there’s plenty of the basic essentials for shoppers. Costco doesn’t offer the widest selection, but what it has is cheap, reliable, and high in quality.
Costco’s huge scale in warehouse and infrastructure logistics also paid off this year. The company’s recent quarterly results positively dazzled: Its reported earnings per share of $2.36 came in 49 cents per share ahead of expectations, truly a blowout number.
Costco has proven itself as a trustworthy institution for nervous consumers this year. That should be good for the company’s membership rolls going forward. And it’s not resting either; Costco added a $1 billion logistics acquisition this year to further its competitive advantage.
Costco’s Stiff Valuation
Alas, as great as the business is going right now, it’s hard to get excited about Costco’s stock here. That’s because, at this time, Costco is selling for 39x trailing earnings. For the year ahead, analysts see earnings jumping around 10% to $9.41 per share. That would put the stock at 35x forward earnings.
You might be wondering why Costco stock’s earnings can’t increase more given the highly favorable economic environment. Costco is firing on all cylinders with the current stay-at-home trend. Even despite that, however, Costco is already so big that it’s hard to grow quickly. Over the past year, Costco pulled in $161 billion in revenues.
It’s hard to move the needle when you’re already that size.
Additionally, with the huge run-up in the stock price, Costco’s dividend yield has fallen substantially. Last year, COST stock yielded around 1.1%. From that already low level, the yield has slumped to just 0.8% annually now. In other words, don’t buy Costco as an immediate income play.
Much More Expensive Than Peers
Let’s turn back to the price-earnings ratio for a second. I wouldn’t dispute the idea that Costco should be the most expensive of the major brick-and-mortar retail companies. Still, just how much of a premium is justified?
Walmart is selling at 26x forward earnings. Walmart remains the king of physical retail, and its e-commerce presence is sharply improved in recent years as well. Target also goes for 26x earnings. Kroger is a lower-quality business than the rest of those peers, but you can’t deny that it’s having a fantastic 2020. Yet Kroger only sells for 14x earnings.
Against that backdrop, it’s really hard to justify paying 39x earnings for Costco stock. Yes, it could work out for the best out of those four if you hold on long enough. But you have to imagine that the valuation gap will close at least a little in the interim as the pandemic tailwind wears off.
Costco Stock Verdict
An investment in Costco today comes down to your time horizon. If you’re looking to make a trade, Costco is probably not going to work that well over the next few months or year. The stock is simply too expensive on an earnings basis for it to offer a favorable risk/reward profile here. With the coronavirus-induced buying surge wearing off, Costco’s momentum will slow in coming quarters.
That’s nothing against the company or its management. Costco is making all the right decisions now in terms of running the business. However, Costco’s share price is now so high that flawless execution will be needed to justify further short-term gains.
On the other hand, if you’re looking to buy and hold a high-quality company for the next five or 10 years, Costco stock is a fine choice. As our Dana Blankenhorn recently wrote, Costco could be an an ideal buy and hold forever position. The pandemic has given the company another chance to demonstrate its excellence. Just know that you’re paying full price for your investment.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
Gallery: 10 Online Retail Stocks to Stick With as Covid-19 Cases Spike (InvestorPlace)
Online retail stocks have been on fire in 2020 for the simple reason that the novel coronavirus
pandemic has shut down physical locations, pushed everyone into online shopping and created an enormous, once-in-a-lifetime tailwind for e-commerce platforms. Year-to-date, the
Amplify Online Retail ETF (NASDAQ:
>IBUY) has rallied 50% to all-time highs. Some pundits are reasonably concerned that as the physical economy reopens -- and consumers can shop in-store again -- the online retail sector's Covid-19 tailwind will moderate, and online retail stocks will fall off a cliff. But recent events show that this isn't going to happen. At least not any time soon. The U.S. tried to reopen its physical economy very quickly. It didn't work too well. Covid-19 cases across the country surged. Now, the state and local authorities are rolling back reopening measures, and shutting down things like indoor dining and bars again. As this has happened, physical retail spending trends -- which were rebounding strongly throughout April, May and June -- have plateaued in July. What else has happened? Online retail spending trends have re-accelerated, to their highest levels since Covid-19 emerged. The investment implication? Stick with online retail stocks. The Covid-19 tailwind isn't going away anytime soon. And when it does ultimately disappear -- likely in 2021 -- most shoppers are going to stick to online shopping because it simply offers a similar experience as in-store shopping, but with elevated convenience and more options.
With that in mind, here are 10 online retail stocks to stick with as Covid-19 cases surge across the country:
>EVER) Let's look at what makes each stand out from the crowd.
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Online Retail Stocks to Stick With: Amazon (AMZN)
Amazon is the undisputed king of e-commerce. Any discussion of retail stocks to buy would be incomplete without AMZN stock. There are concerns out there that Amazon is losing its dominance in the e-commerce sector as the likes of
>TGT) build out more competitive e-commerce platforms, and Shopify enables a new generation of independent e-retailers. Such concerns are overblown. Amazon has responded to increased competition by improving its own Amazon Prime shopper experience, cutting down shipping times to as short as a day and expanding delivery capability to things like groceries. These moves will help stunt market share erosion at Amazon, and ultimately enable the company to continue to reign supreme in the global e-retail market. Thus, for the foreseeable future, as go online retail stocks, so goes AMZN stock. Online retail stocks are going higher over the next few months. So will AMZN stock.
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Ebay has sort of reinvented itself
at the perfect time. Long story short, eBay emerged on the online retail scene as an online "garage sale." That garage sale model has staying power, since people need a place online to sell the random stuff they don't want anymore. But eBay was executing on this model the wrong way, by making it feel too much like a Wild West, free-for-all platform and not a modern, organized e-retail marketplace. Ebay has re-engineered its platform over the past few quarters to, quite frankly, just be better. There's more structure. There's more organization. It just feels more like what a 21st Century e-retail platform should feel like. Then, by complete chance, Covid-19 struck, and now everyone is shopping online. So, in essence, eBay has pulled off the right turnaround at the right time.
Over the next several years, eBay's growth trends should meaningfully improve. As they do, eBay stock will keep powering higher.
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More than one of the best online retail stocks out there, Shopify is the one of the best stocks to buy and hold for the next 5 to 10 years
. The e-commerce solutions provider is morphing into the technology backbone of modern commerce, by providing retailers of all shapes and sizes with the tools they need to create and maintain robust online selling operations. That includes helping merchants build strong e-commerce websites, sell across various online social channels, improve their digital marketing campaigns, enhance their SEO and much more. As consumer spending continues to migrate into the online channel, merchant and retailer demand for Shopify’s infrastructure solutions will soar. So will the volume of transactions occurring on Shopify-enabled websites. This double tailwind will propel meaningfully large revenue growth over the next decade, which will lead to huge margin expansion in the company's highly scalable software-oriented business model. Big picture: Shopify will grow profits by leaps and bounds over the next decade. Sustained big profit growth will drive sustained big gains in SHOP stock. To be sure, the valuation on SHOP stock at $1,000 is rich. I wouldn't chase here. But I would buy big on the next dip.
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Up 150% year-to-date, Wayfair stock may look like it needs a breather. It doesn't. The reality is that the Covid-19 pandemic essentially saved this e-retailer. In two ways. First, it forced consumers who were previously reluctant to shop for furniture online, to do just that: buy couches, mirrors and the like through an app or website. As it turns out, many consumers found that the obstacles that they thought would exist in e-furniture shopping, weren't obtrusive. They liked shopping online for furniture -- hence the 90% surge in revenues in April
-- and will turn into long-term Wayfair customers. To that end, Covid-19 has permanently accelerated the Wayfair growth narrative. Second, by permanently accelerating the growth narrative, Covid-19 has allowed Wayfair to benefit from economies of scale earlier than most expected. Thanks to the Covid-19 inspired volume surge in Q2, Wayfair is expecting to report positive adjusted EBITDA. Sustained big growth hereafter will unlock more margin gains. It should be no surprise, then, that consensus estimates
on Wall Street have moved from positive net profits by 2025 a few months ago, to positive net profits by 2023 today.
Thanks to these two favorable dynamics, W stock will remain strong for the foreseeable future. I see approximately 10%-plus upside potential over the next 6 months.
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LivePerson is one of my favorite small-cap technology stocks to buy for the next 10 years
. In a nutshell, the company makes chatbots. But not the boring, old chatbots that don't understand anything and just frustrate shoppers. These are smart, AI-powered chatbots which are dynamic, helpful and actually improve the online shopper experience by providing personalized, expert, real-time advice to the shopper. These chatbots will start to appear everywhere over the next decade. Consumption is increasingly shifting online. As it does, retailers will invest a ton of money into making their online shopping experiences as good as possible. One aspect of e-commerce that’s currently lacking is interpersonal touch. In-store, you can talk to a sales rep and get product/service advice, but doing so online is trickier. LivePerson's smart, AI-powered chatbots are an effective solution for this shortcoming. Over the next several years, as the e-commerce market evolves, more and more retailers will invest in building out robust digital conversational commerce channels. Many of these retailers will turn to LivePerson to help them power their conversational commerce initiatives. And LivePerson’s revenue, profits and stock price will all soar. After all, this is just a $2.7 billion company today, in the top of the first inning of a promising multi-year growth narrative.
© Source: Shutterstock
Much like eBay -- but on an even more exaggerated level -- Overstock.com has pulled off the perfect turnaround at the perfect time. In 2019, the company got a new CEO, who implemented a multi-faceted turnaround strategy built on improving the platform’s search relevancy, enhancing the mobile web experience, expanding the product’s content on the site, leveraging data to improve pricing strategies, optimizing logistics for shorter delivery times and introducing free shipping on everything. Then, in 2020, the Covid-19 pandemic permanently accelerated e-commerce adoption and forced consumers across the globe into online selling channels. When those consumers arrived at Overstock.com, they were greeted by a platform they liked. With a modern interface. Great prices. A wide product selection. Fast delivery times. Everything that a top-tier e-commerce platform should have. And so consumers spent a lot of money of Overstock.com. Revenues on the site rose 120% year-over-year in April. They’ll keep spending a lot of money of Overstock.com. Both because Covid-19 has permanently accelerated e-commerce adoption in the home goods vertical. And because Overstock.com has improved itself enough to stabilize market share in what will be a booming U.S. home goods e-retail market over the next several years.
However, I'd like to say that OSTK stock is fully priced above $50. So, I'd wait for a material pullback in shares before jumping into the stock, and riding it higher over the next few years.
© Source: Carvana
The future of buying and selling cars is online, and that's largely why Carvana -- the Amazon of the used car market
-- projects as a long-term winner. Sure, CVNA stock is richly valued here. Shares are up 60% year-to-date, and trade at their richest valuation ever
. But this valuation friction isn't intense enough (yet) to offset what are robust operational tailwinds for the used car retailer thanks to low rates, pent-up auto demand and Covid-19. Specifically, today you have: Record low financing costs. A weak economy, with high unemployment, weak earnings and suspect job security. Huge pent-up auto demand, as the average age of cars on the road reached an all time high in 2019
. A global pandemic which has shut down physical retail locations and forced consumers to get comfortable and familiar with buying and selling cars online. Connecting the dots, it's simply the perfect environment for Carvana. Over the next few quarters, a ton of consumers, looking to affordably upgrade their old cars, will tap into record-low financing to buy used cars online. Many of those consumers will do such purchases through Carvana's platform. As such, Carvana will report strong numbers for the next 6-plus months. Strong numbers will force analysts to raise estimates and upgrade the stock. All of those favorable optics will keep bulls in control. So long as bulls remain in control, CVNA stock can and will keep pushing higher.
© Source: nikkimeel / Shutterstock.com
One of the best online retail stocks to buy now, Farfetch stock has huge upside potential over the next several years because the company is on the cusp of leveraging Covid-19 e-commerce tailwinds to transform into the Amazon of luxury fashion. The global luxury fashion market is quite big. About $300 billion
in annual sales. And it’s supported by steady demand drivers, with sales having risen at a 5% compounded annual growth rate since 2008. Importantly, this market is under-penetrated when it comes to e-commerce (just 12% e-retail penetration, versus 30%+ for the broader apparel category
) and highly fragmented (there are several designer brands out there, but no go-to, consolidated marketplace for buying all these designer brands in one spot). Thus, luxury fashion is a big, growing industry due for a digital makeover. Covid-19 has inspired the beginnings of this digital makeover, as consumers looking to buy luxury fashion products have been forced to do so online. Rising consumer demand for industry digitization and consolidation will sustain this makeover over the next several years. Farfetch -- as the No. 1 one
global in-season luxury fashion online marketplace, with 1,200-plus luxury sellers, more than 2.1 million active consumers and a robust app-and-website selling ecosystem -- is best positioned to turn into the Amazon of this market, as it consolidates and digitizes over the next decade. Net net, by the end of the decade, Farfetch will go from what it is today (a $7 billion nascent e-retail company) to the Amazon of a $300 billion industry. Relative to this promising long-term growth trajectory, FTCH stock remains undervalued
So buy now. Hold for the long haul.
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Of all the online retail stocks on this list, I think RVLV stock is the best one to buy for the second-half of 2020. Indeed, I think Revolve's stock could double over the next 6 months. Here's the logic. This is an online retailer. Benefiting from all the same tailwinds as every other online retailer in the world. With exposure to rebounding consumer discretionary spending trends in the back-half of 2020 as economic activity normalizes. And a realistic opportunity to report pretty strong second-half 2020 numbers. Plus, the company's long-term growth narrative as a modern fashion retail platform built on the back of social media and influencer marketing -- at a time when social commerce appears to be on the cusp of huge growth over the next decade -- is quite promising. Yet, relative to other online retail stocks, RVLV stock is dirt cheap. It's trading at just 1.7-times sales. Most of the stocks on this list are trading at 3-times sales or higher. Ultimately, the convergence of strong second-half results on this discounted valuation will spark meaningfully large gains in RVLV stock. According to my numbers, those gains will amount to nearly 100% returns over the next 6 months
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Last, but not least, on this list of online retail stocks to stick with as Covid-19 cases spike is EverQuote. From where I sit, the online insurance marketplace projects to one day turn into the Amazon of insurance shopping. Here's the thinking. In the $150 billion insurance market -- where only 19% of ad dollars are spent online versus 45% online ad spending in other major industries like travel -- the e-commerce revolution is a few steps behind. But the Covid-19 pandemic forced all retail verticals to get on the same page, by shutting down stores and making e-commerce the only option for transactions. Over the next several years, insurance shopping will migrate from offline to online, in a similar way that apparel shopping or travel shopping have done so over the past few years. In the apparel shopping and travel shopping verticals, this online migration birthed huge, centralized online marketplaces like Amazon and
>EXPE). The online migration of insurance shopping will do the same. EverQuote -- the biggest and fastest growing online insurance marketplace out there -- projects to be that huge, centralized online marketplace for insurance shopping, mostly because size matters when creating marketplaces.
Source : https://www.msn.com/en-us/money/companies/costco-is-a-great-company-but-an-expensive-stock/ar-BB189TUb