In this article, we discuss the top 5 cyclical stocks to buy now. If you want to read our detailed analysis of these stocks, go directly to the Top 10 Cyclical Stocks To Buy Now.
5. Costco Wholesale Corporation (NASDAQ:COST)
Number of Hedge Fund Holders: 55
The retail sector has dipped in recent weeks after a weaker-than-expected holiday sales report and concerns around the spread of the Omicron variant. However, even in the bear market, Costco Wholesale Corporation (NASDAQ:COST), one of the retail giants in the US, has managed to defy the near-term pressures by registering small gains through the period. The performance indicates the resilient nature of the stock and highlights a business model that tends to outperform the market when there is a slump.
Costco Wholesale Corporation (NASDAQ:COST) recently beat market expectations on earnings per share and revenue for the first fiscal quarter by $0.12 and $610 million respectively. At the end of the third quarter of 2021, 55 hedge funds in the database of Insider Monkey held stakes worth $4.39 billion in Costco Wholesale Corporation (NASDAQ:COST), up from 54 in the preceding quarter worth $4.32 billion.
In its Q1 2021 investor letter, Ensemble Capital, an asset management firm, highlighted a few stocks and Costco Wholesale Corporation (NASDAQ:COST) was one of them. Here is what the fund said:
“We saw these dynamics at play in the Fund. Some of the worst-performing stocks this quarter were among our best performers in Q1 2020. Another example was the market’s reaction to Costco Wholesale (1.5% weight in the Fund) during the quarter. From December 31, 2020 to March 8th, Costco shares declined 17% and dropped below their pre-pandemic high. The common rationale offered by sell-side analysts was that Costco would face difficult one-year “comps” (i.e. same-store sales, which compare sales from stores open for at least a year). Because so many consumers rushed to Costco ahead of shelter-in-place and subsequent quarantines, it will be harder for Costco to meaningfully beat those results when compared year-over-year. That may indeed be true, but we struggle to understand how Costco could be “less valuable” than it was a year earlier when it concurrently increased its membership base by over 7%, or 3.9 million members. With membership renewal rates around 90%, the vast majority of the new customers Costco brought in last year will be around for years to come.
Analysts also complained about Costco raising its already industry-leading minimum wage to $16/hour, with an average “effective” pay of $23-$24/hour when you include overtime and bonuses. Costco paying its employees “too much” has been a common gripe of Wall Street analysts for at least two decades. While the extra pay does indeed impact short-term profit margins, it also serves to make Costco more durable, as its flywheel (i.e. a virtuous value cycle) starts with happy employees. A 20-year chart of Costco stock price is evidence that this strategy works and we’re confident that it will continue to work.”
