Costco (COST) and Home Depot (HD) are two very different retailer stocks that have avoided this year’s retailer woes, offering unique growth and value propositions for long term investors.
Costco’s membership-based model has insulated itself from the systemic theft issues other retailers such as Target (TGT) and Foot Locker (FL) are experiencing. Meanwhile, Home Depot finds itself in the sweet spot in this higher interest rate environment, where homeowners are sitting on record home valuations and record low mortgage rates.
Let’s take a look at each stocks unique investing propositions…
Costco (COST)
Costco has two potential catalysts in the backdrop, a special dividend, and an annual membership price hike.
The company has issued special dividends four times in its history, roughly three years apart in addition to their regular quarterly dividend payouts. The last special dividend was in 2020 at $10.00 per share with another in 2017 at $7.00 per share. Costco’s cash on hand at roughly $13.7 billion, leading to speculation about a near term special dividend payout in-line with the roughly three-year separation.
As far as membership fee, which helps prevent the theft issue plaguing other retailers right now, Costco last increased the fee back in 2017. But another hike is a “matter of when, not if,” per Richard Galanti, the company's CFO during the latest conference call. The last price hike in 2017 saw it raise the price of its Standard Gold Star membership from $55 to $60 and increase the price of its Executive membership from $110 to $120.
Those prices have remained steady ever since. Galanti told analysts that on average Costco has increased its rates every five years and seven months, which would put Costco on track for another increase in January 2024. The company has a 92.5% renewal rate in the U.S. and Canada with over 125 million members with Galanti adding, “In terms of looking at the values that we provided our members, we continue to increase those in certainly a greater amount than even more than if and when an increase occurs”.
Lastly, Costco may be an unlikely beneficiary of higher rates as the company is less vulnerable to higher borrowing costs and thus does not face headwinds due to increased interest expenses. Investors will likely reward companies such as Costco that are not vulnerable to rising rates since they do not need to access capital while offering stability during economic uncertainty.
Finally, Costco is rated as an “B” (Buy) by the proprietary POWR Rating system based on its Stability and Sentiment attributes.
Home Depot (HD)
Slowing inflation pressures while home values stay steady at an elevated level bodes well for Home Depot. Less pressure will be on the consumer and housing market as inflation subsides and rates stabilize, respectively. This combination may break the weak sales trends that were seen in the first half of 2023 with a recovery in the back half of 2023 and beyond.
With high rates and high home values, few people are willing to buy (or sell) a house. When people can’t change their house for a different one, they often turn to improving the one they have. Especially with the predicted 6% year-over-year house price increase boosting the wealth of homeowners. That’s great news for Home Depot.
The firm is also cheap on a relative basis with its current price-to-earnings ratio at a deep discount compared to its five-year average. Home Depot currently sits at an 11% discount from a price-to-earnings ratio standpoint compared to its five-year average. Home Depot has a consensus buy rating, with a consensus price target that implies upside of about 15% over the next 12 months.
Home Depot is rated a “B” (Buy) by the POWR Rating system based on its Quality, Stability and Sentiment characteristics.
Summary
Both Costco and Home Depot are unique retailers offering a blend of quality and stability with future growth catalysts, while avoiding or even benefitting from the headwinds that other retailers face.
The proprietary POWR Rating system places Costco and Home Depot as a Buy rating. Costco is rated a buy by the propriety POWR Rating based on its stability and sentiment attributes while Home Depot is rated a buy based on its quality, stability and sentiment characteristics.
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shares were trading at $431.01 per share on Friday afternoon, down $2.65 (-0.61%). Year-to-date, has gained 13.95%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Noah Kiedrowski
Noah Kiedrowski is the Founder of Stock Options Dad LLC - A Registered Investment Adviser (RIA) firm where he shares his alternative investment approach to growth and long-term capital appreciation via a blended portfolio strategy using risk-defined options, long-term stock holdings and dynamic cash positioning. Learn more about Noah's background along with his most recent articles and stock picks.
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