Forget the Pandemic Winners, Buy This Inflation Winner Instead

The pandemic certainly produced some stocks that won big. But it turns out that many of these stocks were like meteors briefly shooting across the night sky.

Fifty winners from the pandemic have lost over $1 trillion in market value in just a few years, as investors have lost interest in many of these stocks. Bloomberg data shows that the early pandemic winners have collectively shed more than a third of their total market value, the equivalent of $1.5 trillion, since the end of 2020!

This is just more proof that investing is a very fluid endeavor, with Wall Street moving from hot idea to hot idea like a butterfly in a field of flowers.

Right now, investors should be concentrating on how to find winners from the ongoing inflation wave that has swept America. However, I prefer to do that with an eye on the long term, as well.

One company that fits that description perfectly is Costco Wholesale (COST).

Warehouse Clubs Bonanza

The company is the oldest and most prominent of the warehouse clubs, which require customers to pay annual membership fees for the privilege of shopping in bulk. Others include Sam’s Club from Walmart (WMT)and BJ’s Wholesale Club Holdings(BJ).

All of these warehouse clubs have benefited from a surge in inflation that became noticeable in the U.S. in 2021, and which has since been very slow to subside. These stores have been steadily increasing their share of the U.S. retail market.

Walmart’s Sam’s Club, which has 599 U.S. locations, reported same-store sales growth, without fuel, of 4.4% in the quarter that ended in April. The growth was driven by an increase in the number of transactions rather than prices. BJ’s, which operates 244 club stores in 20 states, reported a 0.6% rise in comparable sales in its first quarter.

Turning to Costco, in its fiscal third quarter that ended in mid-May, the company’s net sales of $57.4 billion were up 9.1% year on year. Membership fees totaled $1.1 billion, up 7.6%. Same-store sales were up 6% in the U.S., excluding the effects of fuel sales and foreign exchange. That is far above the pace of total retail sales in the country. Costco’s net profit of $1.7 billion rose 29% year on year.

Costco Is an Inflation Winner

These results indicate that Costco has emerged as one of the big winners of the U.S. inflation wave, drawing in millions of consumers willing to pay at least $60 a year to gain access to member-only warehouses stocked with bargain-priced goods.

The $60 annual membership grants entry to the warehouses. An extra $60 gives customers an “executive” membership that provides a 2% annual rebate on purchases.

The strategy is working beautifully. Renewal rates are about 93% in North America. And once members have paid the fees, not surprisingly, they are inclined to visit stores more often. Costco’s member rolls have risen more than 20 million to 74.5 million since 2019, including a 3.5 million increase in the most recently reported nine months.

Costco’s strategy in the warehouses is obviously also working. The company deliberately keeps limited inventories inside its stores: fewer than 4,000 units of each item. This allows Costco to earn a decent profit margin on high sales volumes. “We often sell inventory before we are required to pay for it,” Costco said in its annual report.

Founded in 1976, Costco’s footprint has grown to 876 warehouses, with more than 600 of these in the U.S. and the remainder in countries including Canada, Mexico, Japan, and the U.K. Costco has a stellar track record overseas - a rarity for retail chains - and plans are for more expansion overseas.

Buy COST Stock

The company’s sales growth accelerated to double-digit levels during the pandemic. And I like the fact that, while the pace has slowed, it has not stalled, as inflation hovers above 3% in the U.S. The continuing sales growth is probably due to the fact that Costco tends to attract a slightly wealthier range of consumers than other discount retailers. Its customers are more easily able to afford the annual fees.

The company’s shares have more than tripled (up 218%) in the past five years. That’s a pace that rivals some tech giants. The stock is also up 61% over the past year and 26.4% year-to-date. COST now has a market capitalization of more than $366 billion.

The recent special dividend of $15.00 per share, paid on January 12, is tangible proof of the company's financial strength. It is the fifth special dividend in 11 years. The $6.7 billion payout was made entirely from existing cash. The company’s regular quarterly dividend was just raised from $1.02 a share to $1.16.

Costco continues to stand out as a company with consistent growth, thanks to its appeal to value-conscious consumers. COST is a buy anywhere near its current price of $830.