Costco: Flight To Safety

| About: Costco Wholesale (COST)


Costco is doing nothing spectacular yet getting short-term spectacular gains.

Over the last year Wal-Mart and Dollar General have done better.

A proxy for the good things about the U.S. economy.

On the surface there was little reason for Costco (NASDAQ:COST) to pop on Thursday.

The company is actually quite boring. Its strategy is entirely transparent. Its results show modest growth and steady retail margins in the 2% range. Falling gas prices hurt it early in the year, and rising ones help it, increasing total turnover. Yes, the move from Amex (NYSE:AMX) to Citicorp (NYSE:C) Visa (NYSE:V) cards finally kicked in, but the anecdotal evidence on that indicated confusion and some bruised feelings. The gains from it have yet to come.

Yet the stock popped like it had found a new drug.

In a world where bonds, gold and currencies hold no promise of gain, Costco has become a safe haven. A steady, if small, dividend of 45 cents, sales growth that's slightly better than the general economy, and a U.S.-centric business built around upper middle-class buyers (rather than shoppers) is a rare thing. Who cares if Costco now has a price/earnings multiple higher than Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). There's enough cash and short-term securities on hand right now to pay off its debts and it's generating close to $5 billion in operating cash flow a year. That's still rich by conventional standards, but if you're a European or Asian investor you also get the strong dollar to play with.

Costco, in short, represents everything a safety-first investor should be looking for right now. Costco has the right customers, in the right places, doing what seems to be the right thing, buying and consuming in mass quantities. It represents where the economy is going - hunkered down in suburban splendor, isolated in our cars and cul de sacs, safe so long as the supply chain runs and we have somewhere to store the stuff.

Costco has not even been the best place to be in retailing during 2016. Wal-Mart (NYSE:WMT) is up 20% and Dollar General (NYSE:DG) is up 30%. The real story is that the U.S. economy is the strongest in the world right now (I admit that's not saying much) and money is piling in.

What might change this? Costco is still not well-placed for the major demographic change of the decade, a move to cities and smaller living spaces. Costco is vulnerable to domestic upheaval - if Trump looks like a winner I'm dumping it. Costco also is vulnerable to changing investment fashions. A risk-on environment is going to kick it hard. The same with rising interest rates or skyrocketing gas prices.

But you'll have plenty of warning about any of that. Right now Costco is as American as apple pie, as sound as the U.S. dollar, as safe as houses, and as exciting as watching an egg cook on an asphalt road.

Disclosure: I am/we are long COST, GOOGL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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