The only constant is change. I’m sure that’s a famous quote said by enough people in the past that no one person can claim the right to the simple yet profound insight. Today face an environment where the darling bookseller of the late 90’s has turned into a retail powerhouse. Amazon (AMZN) has changed the way we think about retail and even groceries. With its pending purchase of Whole Foods, the company threw the retail world off of its axis.
One of the companies whose stock price took it on the chin after the Amazon/Whole Foods announcement was Costco (COST). Costco is a wholesale retail store that requires customers to be a member in order to shop there. Costco’s stock price took a 15% haircut shortly after the news. Since then the stock has been slowly building a base off the low and inching higher…very slowly.
If you hold to the narrative of a continued economic expansion and a stronger consumer, I don’t see how you can look past Costco. Costco is a middle-upper middle class dream store. It offers premium offerings in food, electronics, clothes, furniture and a host of other products. Amazon certainly is a threat, yet the world isn’t going to change overnight. Seventeen years ago if you bought anything other than a book off Amazon you were on the fringe. Seventeen years has seen two major market crashes and a whole lot of other incremental change.
Incremental change is the key to this entire picture. Amazon is understood as a game changer. It’s not an outlandish argument. In my eyes they are a company that has and will continue to reshape the way we shop. Yet, whether it’s groceries or something else, the introduction of delivery by Amazon and shift in consumer behavior is not going to occur within a month or even a year. Assuming Amazon succeeds to the fullest extent, the process will take many years to complete.
I see the drop in Costco’s stock price as an opportunity. This looks to me as an overreaction by the market to news that has been interpreted as overly negative. Costco is a company that has a dividend yield currently at 1.25%. It’s well positioned in the market, has great brand recognition/reputation, and a proven business model.
A final note, if you look at Costco’s stock performance from a seasonal perspective, historically it does well from October to around mid December. Summer is pretty flat. Given what has recently taken place, the return of buyers to the stock should give the stock some room to rebound. The news of an Amazon/Whole Foods merger is an outlier. Therefore, the standard pattern of behavior might not apply.
Keep Costco on your radar.