Fears of an economic slowdown are sparking stock market volatility at the moment. But I think that I’ve found a recession-proof stock to buy for my portfolio.
The stock is Costco Wholesale Corporation (NASDAQ:COST). It’s a huge part of Charlie Munger’s investment portfolio and I think it could be a great addition to mine.
Buying Costco shares isn’t without risk. The falling value of the pound and the fact that Costco shares aren’t cheap both constitute significant risk factors for me as a UK investor.
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The underlying business, though, looks exceptionally strong and I think that buying shares in October should help my portfolio weather a storm in financial markets.
The business
Costco is a retailer that sells large quantities of products to customers at low prices. Its products are so cheap, in fact, that it’s hard to see how they make any money selling them.
The truth is, they don’t really make much money from selling products. Instead, the company generates profit by having its customers give them money for nothing.
Well, sort of. Costco shoppers pay an annual fee to be able to shop in the company’s various warehouses, and this is what drives profitability.
In many ways this is the dream for a business. But it relies heavily on the company having a certain brand power and a presence in the mind of its customers.
For this model to work, Costco needs a reputation for having the lowest prices. If a product might be cheaper somewhere else, then there’s no point in paying for a Costco subscription.
In other words, Costco has to convince its customers that it’s not even worth shopping around to find the best deals. And I think that it does this very well.
Earnings
Costco reported its quarterly earnings recently. Revenues were up 15% compared to the same quarter a year ago and profits were up 11%.
This tells me a couple of things. The first is that this looks like a classic example of a business dealing with inflation and the second is that the business is likely to fare well in a recession.
In an inflationary environment, I’d expect higher revenues as consumer spending increases and lower margins as costs also increase. That’s exactly what these numbers look like to me.
Higher revenues also indicate to me that Costco can fare well in a recession. Even as economic conditions tighten, the company’s reputation for low prices will continue to attract customers.
There’s evidence that this is already happening. Renewal rates for Costco memberships reached record high rates of 93% in the last quarter, indicating that demand remains strong.
A stock to buy in October
Even with fears of a recession on the horizon, Costco’s business continues to do well. This, to me, sets it apart from the crowd as I look for stocks to buy in October.
