Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Costco Is Winning the Retail Stock Race in 2026
Transcript
- Lucas: So yesterday I was going through the mutual fund holdings for a value-oriented fund I follow, and I noticed something: their single biggest position isn't a bank or an energy company. It's Costco. Luna: Costco? The warehouse club? That's an interesting anchor for a concentrated value portfolio. Lucas: Right. And it got me thinking — we've talked a lot about Berkshire, about the big tech names, about financials. But Costco has quietly been one of the best-performing large-cap stocks over the past decade, and it's actually holding up remarkably well in this current drawdown. Luna: Well, the S&P 500 is down about 3.6% in the past five days, and the NASDAQ's off over 5% — I think Costco's only down around 1% in that span. Lucas: Exactly. And if you look year-to-date, it's positive. That's a huge divergence from the Mag Seven names, most of which are down double digits from their highs. So what's the secret? I think it comes down to three structural advantages that most people overlook. Luna: Alright, hit me with them. Lucas: First — and this is the one everyone knows — the membership model. Costco has something like 130 million members globally, with a renewal rate above 90%. That's recurring revenue that doesn't depend on same-store sales. Membership fees alone generate something like $4.5 billion in operating profit for them. Luna: So effectively, they can sell merchandise at cost or very close to it, because the profit comes from the membership fees. That's a completely different economic engine than Walmart or Amazon. Lucas: Exactly. And that leads to the second advantage: inventory velocity. Costco turns its inventory about every 30 days. Compare that to Target, which is around 60 days. The faster your inventory turns, the less working capital you need tied up, and the less risk you have from markdowns or obsolescence. Luna: And they do that by keeping a limited SKU count — what is it, around 4,000 items versus 30,000 or more at a typical supermarket? Lucas: Yeah, about 3,700 to 4,000. That's the model. They curate. And because they buy in massive quantities — think pallets of a single item — they get unbeatable pricing from suppliers. They then pass most of that savings to the customer, but the velocity makes up for the thin margin. Luna: So what's the third advantage? Lucas: The balance sheet. Costco has almost no debt, over $15 billion in cash, and they use their float — membership fees paid upfront — to finance operations. In a rising-rate environment, that's a superpower. They're not dependent on credit markets, and they have the flexibility to invest through downturns. Luna: And they also have this interesting recent development: selling gold bullion and silver coins. I saw that they sold over $200 million in gold bars in their last fiscal quarter alone. Lucas: That's become a real traffic driver and a margin contributor. It's also a great example of how Costco listens to its customer base — their members skew higher-income, they have disposable income, and they're interested in tangible assets. So Costco brings in gold at wholesale and sells at a tiny markup. It's not a huge profit center in absolute terms, but it drives store visits and reinforces the perception of value. Luna: It's also kind of a hedge for the stock itself — when people are nervous about inflation or the banking system, they buy gold, and they buy it at Costco. That's actually a really clever moat extension. Lucas: Charlie Munger was on the board for decades, and he and Warren Buffett have always admired the business. Buffett famously said he should have bought Costco years ago. And it's not hard to see why: it's a subscription business disguised as a retailer, with incredible capital allocation, and a culture that's almost maniacal about efficiency. Luna: So for someone building a concentrated portfolio — say, 15 to 20 stocks — does Costco deserve a spot alongside Berkshire and the banks we've talked about? Lucas: I think so. The caveat is valuation. Costco trades at around 45 times earnings. That's expensive by historical standards. But you know, it's traded at a premium for years, and the premium has only widened because the business has delivered. The question is: can they keep growing membership and same-store sales at a high enough rate to justify that multiple? Luna: International expansion seems like the biggest lever. They're growing in China, they just opened stores in New Zealand. There's still runway. Lucas: There is. And they're also expanding their e-commerce capabilities — though they're doing it in a very Costco way, not trying to compete with Amazon on speed or selection, but making it easy for members to order bulky items or special buys online. So I'd argue it's a core holding for anyone who wants a portfolio that can sleep at night. Luna: Speaking of sleeping at night — if this episode gave you a concrete takeaway for your portfolio, that's exactly why we do these. And if you find value in these deep dives, the way we keep the show ad-free is through listener support over at buymeacoffee.com/fexingo. No pressure, just if it's useful to you. Lucas: Yeah, we appreciate anyone who chips in. It genuinely helps us keep the research time going. So back to Costco — one last number I think is telling. In the most recent quarter, their global comparable sales, excluding gas and currency, were up over 6%. That's in an environment where a lot of retailers are flat or negative. That's the power of the model. Luna: And their digital sales grew around 15% year-over-year, which is accelerating. So they're not just a defensive stock — they're also a growth stock, just at a slower, steadier pace. Lucas: Exactly. And I think that combination — steady compounder with a subscription-like revenue base — is exactly the kind of stock that belongs in a concentrated portfolio built for the long haul. So for anyone listening, it's worth digging into the proxy statement, reading the annual report, and deciding if Costco fits your own circle of competence. Luna: Great episode. Next time, we'll look at another stock that's quietly compounding in this volatile market. Lucas: Sounds like a plan. Until then.