Costco is not a cheap stock, this fund manager says

Costco Wholesale (Costco Wholesale Stock Quote, Chart, News, Analysts, Financials NASDAQ:COST) has done very well by its shareholders over the years — perhaps a little too well, says portfolio manager JoAnne Feeney of Advisors Capital Management, who thinks the stock has gotten ahead of itself. To chart your post-pandemic investing, Feeney argues there are cheaper and better plays in the retail sector.

“I think Costco is a wonderful place to shop, but the stock I’m less enthusiastic about,” says Feeney, speaking on BNN Bloomberg on Friday. “If you look at people getting back out into the world after the reopening we all love our bargain shopping and Costco is one great place, but there are other places that you can shop for bargains like a Target or a TJ Maxx.”

“And when you look at those stocks, it turns out that a Target or a TJ Maxx is a much better bargain than Costco,” Feeney said. “When you look at how much you have to pay for the stock relative to its earnings this year or next year, those two are much cheaper and still have similar or even higher growth.”

“So, love the company, love the shopping experience but as a stock I would suggest a Target or a TJ Maxx or even a Williams-Sonoma in the retail space,” Feeney said.

Costco has been a steady climber of a stock for years, paying out a small dividend of less than a one per cent yield but rewarding investors with share price appreciation. Costco has gone from about $80 a decade ago to now the high-$300 range, and while the stock is now about even for 2021, having been down a bunch before bouncing back, 2020 was a good year, relatively speaking. The stock returned 28 per cent in a year when retail shopping had its hits and misses, as some stores like grocery and big box stayed open during lockdowns where non-essential retail had to close up their bricks and mortar.

Costco has been in the pandemic beneficiary camp, with revenue numbers growing over 2020. Its fiscal first quarter 2021, delivered this past December, saw net sales climb 17 per cent year-over-year, which was followed by its fiscal second quarter in March and another 15-per-cent increase in revenue.

Sales numbers got even better more recently where Costco’s same store sales for the month of April were up a sparkling 32.5 per cent year-over-year.

Ahead of fiscal third quarter results due later this month, Costco’s Q2 featured $44.77 billion in revenue and $2.14 per share in earnings, compared to analysts’ consensus forecasts for $43.78 billion and $2.45 per share. The company said pandemic-related costs including the extra $2 per hour given to employees over the past year had an impact on earnings, although the company has upped its online game in recent quarters in response to COVID, showing a 76-per-cent year-over-year increase in e-commerce sales in the Q2 2021.

Feeney says specialty retailer Williams-Sonoma could be a good play both during and post-pandemic.

“It’s not as much that bargain shopping experience [but] it’s got a nice tailwind because of all the housing growth we’re seeing both in the US and Canada,” Feeney said. “And that strength and housing means people are going to go out and buy stuff for their houses — new kitchen appliances, new towels, new plates. Williams-Sonoma saw a wonderful upsurge in demand during COVID because people wanted to make their houses look nicer, but now there’s an ongoing tailwind because more and more houses are selling as more and more supply comes on the market.”

“It’s still a bit limited because of the supply constraints in the housing market. Lumber prices are up and it’s slowing down housing,” she said. “But that’s a long tailwind for a company like Williams-Sonoma that sells to folks once they buy a new house.”

“It’s another good stock opportunity and cheaper than a Costco, for example,” Feeney said.

Argus Research analyst Chris Graja last week kept his “Buy” rating on Costco with a raised price target of $420 per share, saying the company’s retail operations will continue to drive growth.

“We believe that Costco’s financial strength and ability to deliver exceptional value to consumers are key differentiators for the stock in the current market environment,” Graja wrote in a client report. “Our analysis of core operations suggests that execution of the business plan remains excellent, with historically strong traffic and membership renewals.”

“If investors are looking for clues to our future ratings or target changes, these two measures of member engagement are likely to be important indicators because they are drivers of earnings growth and earnings stability,” Graja wrote.

Earlier this month, Raymond James analyst Bobby Griffin maintained his “Outperform” rating for Costco but raised his price target to $410 from $375 prior.