Best Stock to Buy Right Now: Costco vs. Home Depot

Costco (COST 0.19%) has a fantastic track record of raising investor capital. Over the past five years, the dominant deposit club chain’s share price has risen 218%. This is partly due to its superb financial performance.

It is also a much higher gain than Home Depot (HD 2.80%) booked over the same period, although the home improvement heavyweight was up 75%. More recently, Home Depot’s the business faced a notable slowdown in sales.

For investors looking to gain exposure to the retail sector, which of these large cap stocks is it better to buy right now?

Everyone knows that Costco is an elite company

Costco is considered one of the best companies in the world. The stock’s impressive performance clearly indicates how high-quality the business is. One obvious reason is its strong financial performance. Its same-store sales have grown consistently every year, which is the dream of any retail business.

Selling a wide selection of goods at low prices is not that exciting. However, Costco’s subscription-based business model is. It offers a predictable, high-margin recurring revenue stream that totaled $1.1 billion in the company’s fiscal third quarter 2024 (which ended May 12), up 7.6% year-over-year . Additionally, its business model encourages repeat store visits.

When it comes to these subscriptions, the company has proven pricing power. Only management announced that it is raising its annual fees for the first time since June 2017. Despite occasional dues increases, Costco’s membership continued to grow, demonstrating the appeal of its value proposition to consumers.

The entire economy is experiencing disruption, and the retail space has certainly not been spared. Dominant e-commerce player Amazonfor example, it had retailers shaking in their boots for a long time. That hasn’t stopped Costco from continuing to grow its revenue and earnings while expanding its membership base.

The problem for investors now, however, is that everyone is fully aware of Costco’s merits. They are well reflected in the current share price, which is near an all-time high. Furthermore, the assessment is excessive. Shares are traded at a price-earnings ratio Ratio (P/E) of 54, a level the retailer has rarely reached before. It’s fair to argue that returns will be disappointing from this point forward.

Home Depot’s struggles should be temporary

Home Depot focuses exclusively on the home improvement sector, which it has long dominated. Its fiscal 2023 sales of $152.7 billion were significantly higher than those of its closest rival. Lowe’s.

After enjoying strong revenue growth during the pandemic, Home Depot has recently struggled to maintain those gains. Same-store sales fell 3.2% in fiscal 2023 (which ended Jan. 28), and management sees a 3% to 4% decline this fiscal year. Consumers are pulling back discretionary spending in the face of macroeconomic uncertainty.

These challenges are worrisome, but for long-term investors, they should be viewed as a temporary problem. Home Depot still has considerable runway to grow its share of a massive market. It benefits from the country’s aging housing stock and lack of homes for sale. Given its brand strength, wide reach and unmatched inventory availability, it is in an enviable position.

Another reason to be bullish on Home Depot is the favorable capital allocation program. Management allocates a large portion of its consistently generated free cash flow to dividends and share repurchases. In fiscal 2023, it distributed $16.3 billion to shareholders through these two methods.

The stock now trades at a P/E ratio of 24, which is less than half of Costco’s valuation. To be clear, I think the warehouse club operator is a better deal, but I wouldn’t touch my stock with a 10-foot pole right now because of its nosebleed rating. For that reason, I think Home Depot is the better stock of these two retail wizards.