U.S. retail is a multi-billion dollar industry and a pillar of the U.S. economy. Amazon (NASDAQ: AMZN), Walmart (NYSE:WMT)And Costco Wholesale (NASDAQ: COST) They are industry titans and world-class stocks that have all outperformed the broader stock market over the years.
These companies generate an astonishing $1.5 trillion in annual revenues. Their size gives them cost advantages that dominate smaller competitors, and they are poised to continue growing for decades to come.
However, their shares are not all equal. Although all three are blue chip stocks, their different price tags give investors a lot to think about. One of these stocks is a buy, one is a hold and the other is a sell. Scroll down to see which is which.
Buy: An e-commerce giant firing on all cylinders
Amazon has become the dominant e-commerce retailer in the United States. The company has amassed a massive 37.6% market share, miles ahead of number two Walmart. No other company has the supply chain capabilities to deliver such a wide range of products to consumers quickly, creating an unparalleled consumer experience. The subscription service, Amazon Prime, only amplifies the value proposition with streaming and other perks.
However, Amazon’s appeal extends beyond e-commerce; The company’s cloud platform is also a world leader. Amazon Web Services is a pillar of the digital economy and a cash cow that generates huge profits. Management invests these profits throughout the company to create future growth opportunities. Arguably, no company is expanding as aggressively into new and existing markets as Amazon, meaning the sky is the limit for its long-term investment potential.
Despite its track record of making millionaires, Amazon stock is still somehow cheap today. Amazon’s heavy investments in growth mask the fact that the stock is at its lowest valuation in a decade when you compare operating cash flow to share price. Meanwhile, analysts expect earnings to grow by nearly 30% per year over the next few years. Don’t hesitate to buy shares and hold for the long term.
Hold: America’s largest retailer could shine in a recession
Walmart is America’s largest retailer; approximately 90% of the country’s population lives within a short drive of a store. The company is known for its low prices and is also known for using its enormous size and bargaining power to achieve this. Walmart’s store network and ability to reach customers have allowed Walmart to grow. The company has expanded into other retail categories, including big box, through Sam’s Club and e-commerce.
Unfortunately, Walmart’s inventory isn’t as valuable as its products. Today, shares trade at a forward price-to-earnings ratio of 28. That’s a premium to the broader stock market, likely due to Walmart’s stellar reputation on Wall Street. The company has paid and raised dividends for 51 years in a row, and a fortress-like balance sheet backs that up. Furthermore, Walmart is likely to thrive in a recession as consumers abandon the competition and save Walmart money.
Analysts expect Walmart to continue growing for years to come, but estimates call for long-term earnings growth to average just over 7%. It’s hard to justify buying a stock at that valuation when all you’re getting is single-digit earnings growth. It might not be a bad idea to hold onto the stock because of Walmart’s stellar fundamentals, but it’s probably best to hold off on buying for now.
Selling: This popular big-box retailer is woefully expensive
Writing this next section is almost painful, but you can’t ignore the facts. Look, Costco Wholesale really is an excellent company. Its sheer size allows it to offer products at low prices, and its famous loss-making products, such as the $1.50 hot dog meal, have created a cult-like following and loyalty among those who shop there. The membership fee that consumers pay to shop at Costco is genius and is the main source of profit.
However, despite the fantastic business, Costco stock has become so expensive that it’s worth considering selling some shares. The stock trades at a colossal price-to-earnings ratio of over 52, yet analysts think long-term earnings will grow at just 9.5% per year. That seems feasible based on Costco’s still-growing store footprint and ability to increase membership dues.
Almost 10% growth is not nothing, unless you pay more than 50 times the profit. There is no margin of safety in the stock price, which is a dangerous position to be in if a recession comes and shoppers open their wallets. Instead of taking the risk, consider selling and getting back in when the price makes more sense.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.
Buy, Sell, Hold: Amazon, Costco and Walmart Stock Edition was originally published by The Motley Fool
