Retail in the United States is a multi-billion dollar industry and a pillar of the American economy. Amazon (NASDAQ:AMZN), Walmart (NYSE: WMT)And Costco wholesale (NASDAQ:COST) are industry titans and world-class stocks that have all outperformed the broader stock market over the years.
These companies generate an impressive $1.5 trillion in annual revenue. Their size gives them cost advantages that put them ahead of smaller competitors, and they are well-positioned for continued growth over the coming decades.
However, their shares are not all equal. Although all three are blue chip stockstheir varying prices give investors plenty of things to consider. One of these stocks is a buy, one is a hold, and one is a sell. Scroll down to see which is which.
Buy: An e-commerce giant operating at full speed
Amazon has become the leading online retailer in the United States, amassing a 37.6% market share, far ahead of Walmart in second place. No company has the supply chain capabilities to quickly deliver such a wide range of products to consumers, creating an unparalleled customer experience. Its subscription service, Amazon Prime, only strengthens the value proposition with streaming and other perks.
However, Amazon’s appeal extends beyond e-commerce; the company’s cloud platform is also a global leader. Amazon Web Services is a pillar of the digital economy and a cash cow that generates huge profits. Management is investing these profits across the company to create future growth opportunities. Arguably, no company is expanding as aggressively into new and existing markets as Amazon, meaning its long-term investment potential is limitless.
Despite its millionaire history, Amazon stock is still relatively cheap today. Amazon’s massive investment in growth masks the fact that the stock is at its lowest valuation in a decade when comparing operating cash flow to its price. In the meantime, analysts estimate that earnings will grow by nearly 30% per year over the next few years. Don’t hesitate to buy shares and hold them for the long term.
Hold: America’s largest retailer could shine in a recession
Walmart is America’s largest retailer. About 90% of the country’s population lives within driving distance of a store. The company is known for its low prices and leveraging its size and bargaining power to achieve this. Walmart’s network of stores and ability to reach consumers has allowed it to grow. The company has expanded into other retail categories, including big box stores, through Sam’s Club and e-commerce.
Unfortunately, Walmart stock isn’t as exceptional a value as its products might be. Today, the stock is trading at a forward P/E of 28. That’s a premium to the stock market as a whole, likely due to Walmart’s solid reputation on Wall Street. The company has paid and collected dividends for 51 consecutive years, and a fortress-like balance sheet backs that up. Plus, Walmart is likely to thrive in a recession when consumers abandon competitors to save Walmart money.
Analysts expect Walmart to continue growing for years to come, but estimates call for long-term earnings growth of just over 7% on average. It’s hard to justify buying a stock at this valuation when earnings growth is in the single digits. It may not be a bad idea to hold on to the stock because of Walmart’s excellent fundamentals, but it’s probably best to avoid buying for now.
Sell: This popular big box retailer is terribly expensive
Writing this next section is almost painful, but there’s no ignoring the facts. Look, Costco Wholesale is a truly great company. Its massive size allows it to offer products at cheap prices, and its famous loss-making products, such as its $1.50 hot dog meal, have created a cult following and loyalty among those who shop there. The membership fees consumers pay to shop at Costco are awesome and are its main source of profits.
However, despite its fantastic business, Costco stock has become so expensive that it’s worth considering selling some. The stock trades at a whopping forward P/E of over 52, but analysts estimate earnings will grow just 9.5% annually over the long term. This seems feasible given Costco’s ever-expanding store footprint and its ability to increase member dues.
Growth of nearly 10% is nothing to sneeze at, unless you’re paying more than 50 times earnings. There’s no margin of safety in the stock price, which makes it a dangerous position if a recession hits and buyers start pulling their portfolios. Rather than rolling the dice, 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 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