We recently compiled a list of the 7 Best Department Store and Discount Retailer Stocks to Buy. In this article, we are going to take a look at where Costco Wholesale Corp (NASDAQ:COST) stands against the other department store and discount retailer stocks.

Consumer Sentiment Across the US

Consumer sentiment in the US is recovering: it rose to a six-month high in August as the positive ripples of optimism over the economic outlook spread across the country. This improved consumer confidence reading was reported by the Conference Board at the end of August, highlighting the perception that business conditions across the country are likely to improve over the coming six months. The results also suggested that the chances of an oncoming recession are declining. The consumer confidence index by the Conference Board rose to 103.3 in August from 101.9 in July, its highest level since February.

However, Americans are still anxious. Concerns about the labor market are soaring, especially after the unemployment rate in the country rose to 4.3% in July, almost a three-year high. The Federal Reserve appears to be mirroring public concerns about the labor market. In a highly anticipated speech to the Kansas City Fed’s annual economic conference, Jerome Powell, Federal Reserve Chair, said that increasing cooling in the job market would be unwelcome. He expressed optimism about inflation rates in the country, claiming that they appeared within the 2% target by the US Central Bank.

“The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

The rapid increase in unemployment is mostly driven by slow hiring, rather than rising layoffs. However, Powell claimed that:

“We do not seek or welcome further cooling in labor market conditions,” he said. “We will do everything we can to support a strong labor market as we make further progress toward price stability.”

Consumer prices in the US rose moderately in July. A report released by the Labor Department at the end of August marked the third consecutive month of tame consumer price readings. Producer prices rose slightly in August to suggest a downward trend for inflation. Reports of falling inflation are running alongside business anecdotes claiming that consumers are employing bargain-hunting tactics to push back against high prices. Consumers are also reducing their purchases and are switching to lower-priced substitutes, which is a promising trend for discount retailers with competitive pricing. Moreover, with rate cuts around the corner, these stocks are poised to do well.

Our Methodology

We used the Finviz stock screener to identify stocks in the department stores and discount retailers businesses. We then shortlisted the stocks that were the most widely held by hedge funds, as of Q2 2024. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Costco Wholesale Corp (NASDAQ:COST)

Number of Hedge Fund Holders: 71

Costco (NASDAQ:COST) is a Washington-based retail company specializing in a wide array of products for its consumers and ranks second on our list of the 7 best department store and discount retailers stocks to buy.  It currently operates around 878 warehouses, and plans to open 28 new stores in 2024 across the globe, with most of them being in the US.

Costco (NASDAQ:COST) has maintained a steady business throughout the years. One of the primary reasons behind the company’s continuous growth is its operation sector. It functions in a sector poised to withstand economic turbulence and is likely to see an increase in revenue and memberships as it continues to grow. In addition, Costco (NASDAQ:COST) is leveraging the shift to online shopping, offering convenience and a wide variety of competitively priced products. It underwent a 21% growth in its ecommerce business in the last quarter. 

The company is traversing a positive trajectory in terms of its financials. Last quarter saw a 9.1% year-over-year revenue growth. While growth was strong in the US, it was even promising internationally, with same-store sales growing 8.5% year-over-year (adjusted for gasoline prices). Costco’s (NASDAQ:COST) international growth potential appears strong. For instance, customers saw a five-hour wait to enter the company’s recently opened store in Okinawa Japan on its first day. Costco also increased its premium membership fee from $120 to $130 a year.

Costco (NASDAQ:COST) sports a consensus Buy rating among analysts, with its median price target of $892 implying an upside of 4.88% from current levels. The company’s sales are growing in Q3 2024, primarily due to merchandising of high-quality items that resonate with members. Members are also purchasing more core merchandise and discretionary items, and bakery sales are thriving as well.

ClearBridge Sustainability Leaders Strategy stated the following regarding Costco Wholesale Corporation (NASDAQ:COST) in its Q2 2024 investor letter:

“Consumer staples holdings were also standouts in the quarter, such as Costco Wholesale Corporation (NASDAQ:COST), which continues to execute well and delivered better than expected earnings, helped by strong traffic driving better expense leverage. Customers also looked to be shifting toward more discretionary purchases.”

Overall COST ranks 2nd on our list of the best department store and discount retailer stocks to buy. While we acknowledge the potential of COST as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than COST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.