This post is part of a series featuring bargain stocks that are worth a look now. See more Cheap Stocks.
In troubled economic times, it seems like a no-brainer that discount retailers will fare better than their mid-market competitors. Of the discount group, Costco Wholesale (NASDAQ: COST) garners extra points for its brand recognition, broad geographic reach, and dedication to its customers.
Speaking of customer service, I recall being mildly shocked earlier this year upon reading this BusinessWeek article, which alleges that Costco often chooses to cater to its customer base rather than pleasing its investors. Amid skyrocketing commodity costs in July, the mega-retailer warned of a quarterly earnings shortfall, because of a reluctance to hike its own prices and potentially alienate its customer base.
I'm no CEO, but to my mind, the happiness of Costco's investors is directly pegged to how satisfied its customers are. If shoppers are turned off by price increases and take their business over to, say, Sam's Club -- what have the investors won? It takes a clear-headed management team to consider the long-term effects on its core customer base over the short-term demands of frustrated traders.
As it turned out, COST's decision not to jack up prices was probably the smartest, since the commodities bubble collapsed and inflation started to reverse at nearly the same time the retailer offered its profit warning. In fact, Costco missed consensus earnings estimates by just fractions of a cent per share, compared to CFO Richard Galanti's prediction of a 5-cents-per-share shortfall.
Impeccable timing aside, there are more reasons to like COST. On the charts, the equity is perched comfortably atop support from its 100-month moving average. This critical trendline previously contained the stock's lows in 2003, and could once again act as a springboard for COST's next move higher.
Analysts seem remarkably unenthusiastic about this cut-rate general store. Zacks reports 13 Hold opinions, compared to just 1 Strong Buy and 1 Strong Sell. This skeptical configuration could lend itself to quite a few upgrades as Costco reaps the benefits of its customer-focused business model.
In fact, interested investors may want to jump on the stock's bullish bandwagon now, before it becomes overcrowded. COST's price/earnings ratio at the end of November was 17.8, comfortably below its five-year average of 24.8.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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