Do you remember the good old days when everything was cheaper?
Thankfully, inflation has slowed down to just 3.4% over the past year. But that doesn’t mean prices are going back down.
It just means they’re not going up as fast.
That’s why everybody feels bad even though the economy is doing pretty well. And why shoppers keep looking for better deals.
But there’s one deal that seems to be inflation-proof: Costco’s hotdog combo.
Since 1984, Costco has sold its hotdog combo for $1.50 – even though 40 years later – inflation has caused prices to nearly triple.
It’s just one of the reasons Costco has millions of loyal members. And not just in America, but all around the world.
The company opened a new store in Shenzhen, China, a couple of weeks ago. Tens of thousands of people lined up for hours just to get in and spend their money.
And while this may convince you – like many others – to think Costco is a great investment right now… It’s not.
Although Costco is a wonderful business (selling many things at great prices), its stock is currently overvalued.
Today, I’ll show you why it’s not a good idea to invest in Costco right now. And give you the name of one of its competitors that offers a much better deal.
Why Now Is Not the Time to Buy Costco
Smart shoppers (and investors) know not to pay full price. Instead, they wait patiently for a sale before snapping up what they want.
Grocery prices change every week. If you try to buy produce that’s out of season, you’ll probably pay an arm and a leg for the privilege. Other times, stores will mark down perfectly good food to sell it faster.
The same thing happens in the stock market. Every day, you see a different price for companies that are – most of the time – not any different than they were the day before.
So the smart investor finds the high-quality companies trading at a bargain and avoids the ones selling for full price.
Right now, Costco is trading at full price.
Its stock yields just 0.6% and trades at close to 44x earnings. That means if the company didn’t invest in its business and gave all its earnings to shareholders, it would take 44 years to get your money back.
The last time Costco traded at a valuation this high was in early 2022. Share prices then quickly dropped by 32% in a single month.
I don’t want you to fall into the same trap and invest right before another major price drop.
A Better Discounted Play in This Market
Over the past decade, Costco shares have traded at an average “normal” price of 34x earnings. Costco is a fantastic high-quality business, but I wouldn’t buy it at current prices.
Instead, one of Costco’s biggest grocery competitors is trading at a discount right now.
Kroger (KR) is the second largest grocery retailer in America. And it’s planning to merge with Albertson’s to grow even bigger.
Though Kroger doesn’t have a membership program that gives an awesome deal on hot dogs, it does have a loyalty program that helps customers save on gas and groceries. With more than 62 million households enrolled, Kroger has a ton of data on what its customers want to buy.
Kroger is a reliable dividend grower that has increased its payout 18 years in a row. It’s also a great recession-resistant business because people tend to buy more groceries and cook at home instead of eating out at restaurants when times are tough.
Kroger shares currently yield 2.5% and trade at 10.8x earnings. That means it’s “on sale.” Historically shares have traded at an average of 13.3x earnings. So right now you can buy them for 19% off.
So skip the pricey Costco shares and add some Kroger to your portfolio instead.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily