Joe Raedle/Getty Images News


I usually cover technology in my research articles here on Seeking Alpha, but today, I want to discuss one of my favorite consumer discretionary names that has both defensive qualities in today’s macroeconomic environment yet growth-like prospects for its share price. That name is Costco (NASDAQ:COST).

While most people in the U.S. are familiar with Costco, just to make sure everyone is on the same page, here is a refresher.

To put it simply, Costco is one of the largest big box retail names that has one of the strongest gross margin profiles for its industry (at ~11%) along with a strong recurring membership business that has a renewal of approximately 90%. Its market leading status, along with its corporate culture to keep prices as best as possible for consumers, make it exceptionally challenging for competitors to take market share away from Costco. In addition, the retailer has a customer list of over 63 million households and over 114 million total cardholders.

A brief description of the current macroeconomic environment from my Social Media channel data checks

As an investment strategist who is also a content creator on YouTube, Twitter, and Substack, I have access to large sets of consumer sentiment and retail emotions via the comments I receive from my audience as well as the data I’m able to collect via polls that I conduct.

And in recent polls, we can see below that my viewers on YouTube (who are most likely well-educated, affluent, and work in traditionally stable industries) are getting skittish about the economy.

You can see in the poll below that only 35% of my viewers believe they have a strong outlook on their own job security and job prospects. That doesn’t exactly check off the box that we are in a strong economy. You can also see in the second poll that on top of job security concerns, my viewers also reported that more than 35% of them saw rent prices go up at least 4% while only 16% of viewers saw rent prices grow modestly between 1% and 3%.


My poll data is also highly consistent with data coming from Redfin and Realtor where they report U.S. metro cities seeing rent go up at least double digits.

  • Rent prices went up 17% y/y
  • New York – up 23% Manhattan
  • Boston – up 20%
  • Chicago – Up 12%
  • Seattle – Up 19%
  • San Diego – Up 25%
  • Miami – Up 30%


The reason I am providing this background information is so that my readers here get refreshed on the fact that the financial conditions for most people in the U.S. is getting tighter and more challenging. In fact, according to the University of Michigan consumer confidence index which now printed 65.2 for the latest month, which accounts for consumers’ frustration towards higher prices across consumer goods as well as rising interest rates.

Consumer Confidence (University of Michigan) (University of Michigan Consumer Confidence Index)

Inflation is an already known serious issue, and unfortunately with the Zero Covid policies happening in China and the Russia-Ukraine crisis, elevated prices seem to want to stubbornly hang around. The Fed’s monetary policy strategy to hike interest rates by 50BP per meeting for the next several meetings with tighten conditions even further.

Why this matters for Costco Investors

In this challenging economic environment, we must be on the lookout for companies that will likely still maintain their loyal customer base while being able to still execute on their growth initiatives.

I believe Costco checks off a lot of the boxes for investors looking for a company to provide both a defensive dividend yield and offensive qualities when a rebound materializes.

In April, Costco reported comparable sales of 12.6%, which was above 8.9% growth the Street was expecting. In addition, US Core Comps reported 8.1%, also ahead of the street’s 7.7% consensus estimates. These figures are especially impressive as it appears macro headwinds from higher mortgage rates, the wealth effect of a declining stock market, and a weaker outlook on job prospects did not impact Costco’s business performance.

In fact, because Costco competes very heavily on pricing, consumers that are skittish about the economy may shy away from more discretionary spending and spend more time at Costco where pricing continues to be provided at the best possible rates adjusted for inflation.

Balancing Risk & Reward with Costco in this challenging macro environment

We’ve witnessed lately that any company that is unable to meet Street consensus figures or provide guidance well above estimates was likely to have their share price punished or have any meager rally fade immediately the following day.

With Costco’s valuation trading at north of 40X earnings, we have to readily accept that a sharp and unexpected downturn in consumer confidence makes their share price vulnerable as it will impact their same-store-sales figures and therefore their comparable results. I believe consumers will continue to shop at Costco in spite of macro headwinds such as interest rates and inflation because Costco offers all of its customers simply the best possible pricing for its high-quality products.

I’m more concerned about a prolonged economic downturn and its impact on Costco than from competitive forces like Walmart (WMT) and Amazon (AMZN). The reason I do not believe Costco is fundamentally challenged by Walmart and Amazon is that shoppers go to these different retailers for different reasons. Costco is focused on selling products in bulk with a membership business model while Walmart adopts a big box traditional retailer business model.

For investors interested in Costco, from an entry planning and technical analysis perspective, Costco’s 200-moving day average is approximately $507/share. And the stock is now testing this level which hasn’t been breached since March 2021. For investors who are looking for a name that has inflation-resistant defensive qualities while having the offensive characteristics of a growth stock, I believe Costco is now an opportunity for investors to start building a long position at an objective entry at its current long-term 200 moving-day average in the face of a challenging consumer spending environment that is likely to drive stronger retail market share gains for Costco in the coming quarters.