Best Stock to Buy Right Now: Costco vs. Home Depot

Costco Wholesale  (COST 0.38%) and Home Depot (HD -0.40%) are certainly two businesses that many people are familiar with these days, both from a customer perspective and an investment point of view. Over their long and successful histories, the shares of these companies have performed extremely well.

But which of these megacap retail stocks is the better addition to your portfolio right now? Let’s take a look.

The case for Costco

With fiscal 2023 net sales of $238 billion, Costco is the world’s third-biggest retailer (only Walmart and Amazon are larger). This unrivaled scale creates some powerful benefits for the business.

Costco has tremendous negotiating leverage with its suppliers. This results in low costs for merchandise. The savings are passed to customers in the form of everyday low prices, which results in more revenue. It’s a positive feedback loop that is hard to replicate, and it’s strengthened by Costco’s successful membership program.

The company is proving just how resilient it can be. Despite the pandemic, supply chain bottlenecks, high inflation, high interest rates, and the uncertain economy, Costco has been able to report consistent same-store sales growth in fiscal 2020, 2021, 2022, and 2023. And it’s been the same story through the first three quarters of fiscal 2024.

Even though this is a massive corporation, Costco still has meaningful growth potential. Executives plan to open 25 to 30 net new warehouses per year going forward, after opening 23 in fiscal 2023. International markets present a huge opportunity.

Homing in on Home Depot

Home Depot is also a gigantic retailer, with trailing-12-month revenue of $152 billion. However, it focuses exclusively on the home improvement industry, selling tools and supplies to both DIY and professional customers.

This business is the clear leader in the space, and its size puts Home Depot in an advantageous position. It has the brand recognition, wide reach (2,017 stores in the U.S.), and omnichannel capabilities to cater to its customers’ needs.

Same-store sales dipped 3.2% in fiscal 2023 (ended Jan. 28). And during Q1 2024 (ended April 28), this figure was down 2.8%. That’s not particularly encouraging. But it might just be temporary, because more consumers are holding off on big-ticket purchases nowadays.

It’s easy to be optimistic over the long term, though. The domestic home improvement industry is valued at $1 trillion, giving Home Depot a relatively small 15% share that it can grow.

Investors might be drawn to this stock because of Home Depot’s favorable capital return program. The company not only repurchased $649 million of shares last fiscal quarter, but it also paid $2.2 billion in dividends. These moves boost investor returns.

The deciding factor

Both Costco and Home Depot are wonderful businesses that are leaders in the retail sector. However, I believe the former is a better company. It’s posting durable growth regardless of the macro backdrop, indicating that it’s more resilient. And the memberships incentivize repeat visits from customers.

However, this doesn’t automatically mean Costco shares are a no-brainer buy. It’s actually the opposite. The stock is extremely expensive, trading at a price-to-earnings (P/E) ratio of 52. Apart from recent highs, the stock hasn’t been this pricey since before the turn of the century.

Home Depot shares, on the other hand, trade at a P/E ratio of 23. To be clear, I think most investors would agree that Costco deserves a higher valuation multiple. But the warehouse chain’s current P/E ratio tells me that the stock is way overvalued right now.

Home Depot is still a great business, and its shares are much more attractively priced. It’s the better company to add to your portfolio today and hold for the next five years.