What Trade War? Costco Stock at New Highs Because of China

U.S.-China Relations Aren’t Dead Yet. And Costco Stock Investors are Cashing In

Trade war fears have thrown cold water on U.S. stocks of late. But not Costco stock.

Shares of the membership-only wholesale retailer just gapped up to new all-time highs after the company opened its first-ever store in China, to near-dangerous fanfare. The new Shanghai store had to shut down on early on Tuesday, its grand opening, due to too many shoppers, with police being called in to manage traffic and restore calm.

Safety issues aside, the words “too many shoppers” were music to Wall Street’s ears; Costco (COST) was up more than 7% on Tuesday and early Wednesday on the news. At 298 as of this writing, Costco stock is up 47% year to date.

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Though the company has had an online presence in China for five years, the popularity of its first brick-and-mortar store bodes well for future business in the world’s most populous country. It could significantly add to the top and bottom lines of a company that’s already expected to grow earnings 13.8% and sales 7.9% this year.

For Costco, the model for success in China is likely Walmart (WMT). The U.S. retail giant entered the Chinese market in 1996 with the opening of its first Sam’s Club, a Walmart subsidiary that’s similar to Costco’s membership-based, buy-in-bulk model. Today, there are 23 Sam’s Clubs in China (Walmart plans to double that tally by the end of 2020), with more than two million members.

China alone won’t help Costco catch Walmart. But it certainly qualifies as extra momentum for a company that is on track for its third straight year of double-digit EPS growth. During that two and a half-plus years of strong growth, COST stock has risen 86% (see chart since the start of 2017 below).

Costco stock has been on a tear the last couple years.Buying fresh off the latest breakout looks like a good momentum play, though you may want to wait for the inevitable post-gap dip. With a price-to-earnings ratio of 36, COST looks a bit pricey. But given the growth outlook – sales are expected to grow another 7% in 2020, with 6% EPS growth, both better than next year’s estimates for Walmart – and the reliability of the outlook no matter the economy, the P/E isn’t a major red flag.

The dividend (0.93% yield) is modest, but that’s growing too, having more than doubled in the last five years. Between the dividend growth, solid sales and earnings growth, and expansion into China (however big that expansion may be), there’s a lot to like about Costco stock right now.

Bigger picture, the flood of customers into Costco’s first China store shows that the trade war hasn’t ceased commerce between the world’s two largest economies. Despite President Trump’s (since contradicted) call for American companies to “immediately start looking for an alternative to China,” business goes on between U.S. and Chinese companies. Thus, there are plenty of U.S. stocks benefiting from expansion into China – and vice versa.

If you need help identifying which companies other than Costco are benefiting from ongoing U.S.-China synergies, I recommend subscribing to our Cabot Global Stocks Explorer advisory, where chief analyst Carl Delfeld has an entire portfolio of international stocks thriving thanks to global growth and commerce. Several of them are Chinese stocks, including one of his biggest winners.

To learn more, click here.

Chris Preston

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Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.

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