Not only has it been a tough climate for consumers amid inflation, it’s also been a tough climate for public companies that rely on investors to help drive their success. A recent survey by COUNTRY Financial found that 28% of Americans are putting less money into investments and savings as a result of inflation.
Though the year has been predictably rocky for the stock market as worries over a recession continue, some big businesses appear to be solvent, long-term buys for investors looking to ride out a recession without losing money. Here, we look at Costco and Home Depot in an attempt to determine which is the better stock to buy during these economically difficult times.
Consider the PEG Ratio
Asher Rogovy, chief investment officer at Magnifina, LLC, suggests looking at the price/earnings-to-growth (PEG) ratio when assessing a potential stock buy. This is a stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period.
“We assess [Costco’s] forward PEG ratio to be around 2.9, while [Home Depot’s] is near 2.1,” Rogovy said. “Lower PEGs are better, and 1.0 is a good target for typical stocks; however, very stable businesses can justify higher PEGs, particularly if they pay a consistent dividend. Both [Home Depot] and [Costco] qualify. While neither looks compelling from this valuation metric, the market prices them as safe, stable and still-growing businesses.”
Both Companies Exhibit Stellar Opportunities for Investors
The PEG ratio is a useful tool for weighing the investment value of a company, but it’s not a magic tool that definitively answers whether a company is a smart investment or not.
“If it were that easy, a simple spreadsheet would be the best investment manager,” Rogovy said. “Both companies exhibit numerous qualitative measures of investment quality.”
James Allen, founder at Billpin.com, agrees that both Costco and Home Depot have their strengths.
“Costco’s economic moat is unmatched, with its massive scale allowing it to control negotiations with suppliers and pass on cost savings to customers,” Allen said. “Its global membership renewal rate is impressive at 90.5%, and its revenue has increased at a compound annual rate of 12% over the past five years. However, its current price-to-earnings (P/E) ratio of 38 is quite high.
“On the other hand, Home Depot is the undisputed leader in the home improvement market, with half of its revenue coming from DIY customers and the other half from professional customers,” Allen said. “Despite recent inflationary pressures, there’s a huge opportunity for the business to continue expanding. Its shares trade at a P/E multiple of 18, a meaningful discount to its rival Lowe’s.”
Home Depot Stock Is More Affordable
If pricing is a concern, it’s worth noting that Home Depot shares ($308.96 a share as of the morning of June 28, 2023) are currently much more affordable than Costco shares (priced at $533.92 as of the morning of June 28, 2023 ).
“If you really want to buy either, in terms of price, Home Depot is a more affordable stock to purchase,” said Jonathan Merry, CEO and founder at Moneyzine.
Costco Appears To Have a Slight Edge in Market Structure
But in the opinion of Rogovy, Costco appears to have the edge in market structure, which could, arguably, make it a better buy than Home Depot.
“[Costco] is in a league of its own,” Rogovy said. “[Its] business really is unique. I don’t see any serious competitors.”
Charlie Munger Is a Costco Fan
Charlie Munger, who works with Warren Buffett, has also publicly expressed his appreciation of Costco as an investor — despite its presently pricey bar to entry.
“Last year Munger said, ‘I’m not saying I’m buying Costco at this price. But I’m certainly not selling any,'” Rogovy noted.
Munger went on to say of Costco, “I think it’s going to be a big, powerful company as far ahead as you can see. And I think it deserves its success. I think it has a good culture and a good moral ethos. And so I wish everything else in America was working as well as Costco does. Think what a blessing that would be for us all.”
Think Hard Before Investing in Either Costco or Home Depot Right Now
Despite all this, there’s a case to be made that based on their sky-high prices at the moment, neither Costco or Home Depot are necessarily smart buys right now.
“At the current prices, I would not recommend either,” said Merry, who owns stock in both companies. “It will take some time for either to recover, and the stock market is really volatile right now.”
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