Costco Wholesale Corporation (COST), Wal-Mart Stores, Inc. (WMT): Pick Your “Discount” Stocks Carefully

Target Corporation (NYSE:TGT) also used the weather excuse for its 29% decrease in quarterly profit; it cited chilly temperatures and consumers’ financial anxieties for a disappointing quarter. Sales rose an anemic 1%, and same-store sales slid by 0.6%. Target Corporation (NYSE:TGT) also reduced its yearly profit expectations.

Meanwhile, in mid-May Wal-Mart Stores, Inc. (NYSE:WMT) presented investors with a lackluster quarter as well. However, the megadiscounter had the good grace not to blame the weather, but instead pointed to its customers’ financial problems, given high unemployment and the newly reinstated payroll taxes. Its comparable-store sales fell by 1.4%, illustrating the current weakness.

Rethinking “value” versus “premium” pricing
On the face of it, shares of discounters Wal-Mart Stores, Inc. (NYSE:WMT), Big Lots, and Target Corporation (NYSE:TGT) look a lot cheaper than Costco. However, when you put their current woes into the equation, think twice about considering them such great bargains.

Meanwhile, Wal-Mart Stores, Inc. (NYSE:WMT) and Target are even trading near 52-week highs. There’s a problem with this picture.

Investors may be tempted to sell Costco Wholesale Corporation (NASDAQ:COST), or hold off buying it. The retailer is a leader in its space, so it’s no time for long-term shareholders to sell. For those who are put off by its 52-week highs, wait for the moment when we see how the market’s often inefficient; you can often get a better price on some blip in a company’s results.

Pick your discounted discounter stocks carefully. Emphasizing a company with strength like Costco, and either buying it or putting it firmly on your watchlist, is a far better strategy than assuming supposedly cheaper valuations will make you money over the long haul. If they don’t perform, it will turn out they’re not “cheap.” Costco’s got proven performance on its side.

Alyce Lomax has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale (NASDAQ:COST). The Motley Fool owns shares of Big Lots and Costco Wholesale.

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