Best Stocks to Buy Right Now: Home Depot vs. costco

Last year was a fantastic year for the market. S&P 500 It rose 24% in 2022 after falling by double digits. Many companies have benefited from the continued upward trend.

Look at the warehouse club operator. costco wholesale (expense 0.71%). In 2023, the stock surged 45%, outpacing the overall index. But there home depot (HD -0.79%)The stock price rose only 10% last year.

There are valid arguments for the investment merits of both. top retail stocksBut let’s see which one comes out on top.

Home Depot Case

Home Depot is a leader in the home improvement industry, accounting for 16% of the market with $154 billion in sales over the past 12 months. While this is certainly a significant amount, it shows the potential market share this business could capture.

The company is experiencing some difficulties and expects sales to decline by 3-4% in the current fiscal year. However, executives are optimistic about the industry due to aging housing inventory, the popularity of remote work, and a shortage of housing inventory in the United States. All of this supports Home Depot’s long-term growth.

The business serves both DIY and professional customers, with each group accounting for about half of overall sales. For example, having contractors, plumbers, and electricians take such significant stakes was financially beneficial to Home Depot. It has historically produced better results. operating profit margin and return on invested capital than a smaller rival Rowe’s CompanyOnly 25% of revenue comes from experts.

Investors will also find Home Depot’s capital allocation policy very favorable. The business has paid steadily increasing dividends since 1987. The current yield of 2.4% provides a decent passive income stream.

And because the retailer generates so much free cash flow, management also engages in share buybacks, increasing the ownership stake of remaining shareholders.

In the case of Costco

If you look at the historical financials of retail giant Costco, the first thing you’ll realize is how strong its performance was during and after the height of the pandemic. Revenues increased by double digits in fiscal 2021 and fiscal 2022.

And the momentum continued. The company reported net sales growth of 6.7% for fiscal 2023 (ended September 3) at a time when inflationary pressures were a headwind.

Even if the economy were to be hit by a severe recession, I doubt it. I think Costco is okay.. Can’t say this about most other companies.

The core of Costco’s business model is membership. Customers must pay an annual fee for the right to shop at one of the company’s warehouses, providing a steady stream of revenue. This is what sets Costco apart from typical retailers like Home Depot.

Membership models can also help drive incredible customer loyalty by encouraging consumers to shop at Costco locations over competitors simply because they are members. The membership renewal rate in the U.S. and Canada in the first quarter of fiscal 2024 was 92.8%, demonstrating customer loyalty.

Since Costco is the world’s third-largest retailer, you might think it doesn’t have much growth potential left. This is an incorrect assumption. For the current fiscal year, management plans to open 31 new warehouses, up from 23 openings last year. We currently only have six stores in China, so China will be a huge source of growth for us.

Is valuation your biggest concern?

Both Home Depot and Costco have attractive investments. The answer to which stock is better depends on how much you prioritize valuation.

Home Depot’s current price-to-earnings ratio is 22.7, which is significantly lower than Costco’s 47.4. If your main interest is buying cheap stocks, Home Depot is the clear winner here. But if you’re interested in owning a top-quality business, regardless of price, Costco is a natural choice.