Join Us in a Game of “Would You Rather” …
Would you rather buy Costco stock, or the silver it sells?
Let’s have a little bit of fun here today.
And play the inaugural installment of the Stock Picker’s Corner (SPC) Wealth Builder Game “Would You Rather” …
I’m your host … William Patalon III.
Today’s contestants here are ….
Peter Krauth, author of The Great Silver Bull (Disclosure: As an Amazon Affiliate, we may earn commissions from qualifying purchases on Amazon), a longtime colleague of mine, who I interviewed at length back in early March.
Me (it’s my game and I can play if I want to).
And … You. That’s right … you. I want you to participate. In the comments below.
So here we go …
Costco Wholesale Corp. COST 0.00%↑ started selling one-ounce bars of 24-karat gold last September. With that gold bullion selling out faster than Costco could replenish its inventory, the members-only warehouse club in January diversified into silver coins.
According to analysts at Wells Fargo, Costco is currently selling $100 million to $200 million worth of gold and silver a month.
Sales have climbed partly because of "Costco's aggressive pricing and high level of customer trust,” Wells Fargo analyst Edward Kelly wrote in a research note. “The accelerating frequency of Reddit posts, quick online sell-outs of product, and Costco's robust monthly eCommerce sales suggests a sharp uptick in momentum since the launch.”
One of Costco’s chief goals has been to build its digital (e-commerce) business. Now it’s using this precious-metals strategy to drive digital sales. That business unit saw sales surge 17% in December and an even-better 21% in January.
The company just boosted its quarterly cash dividend 9.4% – from $1.02 to $1.16 a share. And the digital push was a major reason why.
That brings us to our game for today …
Would you rather:
Buy 25 one-ounce Canadian Maple Leaf silver coins (assuming Costco has worked out some of the issues with coins arriving damaged and seals being broken/torn/tampered with) – reported price: $779.
Or one share of Costco? Recent share price $722.
Here’s what Peter had to say:
“I’m quite sure Costco shares will do well, especially given the inflationary decade I believe we are in.
As a weekly Costco customer myself, I’m a big fan and happy Costco member, especially because I absolutely LOVE bargains.
So I know Costco’s prices are nearly impossible to beat … ever.
But I do think silver will outperform Costco over the next 10 years, mostly because of a reversion to the mean.
For one, Costco shares themselves would be hard to qualify as a bargain right now. They’re trading at a P/E of (hold your breath) 47. That’s extremely rich, because the S&P is already expensive, and it’s trading at a P/E of about half that much … at about 25, right now.
Even that 25 is historically high – given the S&P’s long-term average of about 17.
So one of two things is likely:
Costco’s share price corrects significantly.
Or it moves sideways – possibly for years, as its earnings catch up to its price.
On the other hand, silver is probably one of the cheapest assets on the planet right now. You’d be hard-pressed to find anything cheaper.
It’s still trading at nearly half its all-time nominal high. And you already know my target for this silver bull market is $300.
So my (hypothetical) suggestion is to buy what Costco’s selling – silver bars – rather than Costco shares.
Over the next 10 years, you’ll likely do considerably better.”
Here’s my take (Bill Patalon):
Welcome to the Whac-A-Mole Economy – where dour-and-scared American consumers just aren’t buying the storyline where the “real” economy seems to be strong.
The “experts” … the media … other financial publishers … say that inflation is the trigger … the culprit … behind the dour view that American consumers have of the U.S. economy, their personal outlooks and the “what comes next” for both.
Those folks are correct … sorta/kinda.
It’s really about cumulative inflation – and the 20% leap in prices we’ve seen since 2020.
That 20% increase in prices I just mentioned?
Hourly wages surged an even higher 21.5% during that same stretch.
But inflation and wages have swapped places since January 2021, when U.S. President Joe Biden took office. (And that’s a data point … not a political one.)
Since that point, wages have marched 15.4% higher. But inflation has surged an even higher 18%.
One thing spikes in price. The price finally eases … but then we are sucker punched by something else.
First it was rental cars. Then gasoline. Then eggs.
And when you break that down into some specific areas, the pain points become readily apparent, Washington Post Columnist Heather Long says.
Car insurance is up 44% (including 20% in the last year alone). Gasoline has soared nearly 35%. Electricity has zoomed 28%. And rent has jumped nearly 20%, Long reports.
Groceries have jumped nearly 21%.
It’s been more than 30 years – that’s right, three decades – since food chewed up this much of our paychecks. Whether we’re eating at home or dining out, a full 11% of our income now goes to food – the most since 1991.
If it seems like I drew that out a bit, it was intentional.
You see … back during my days as a national business journalist, I learned a powerful lesson that’s served me well here: Whenever possible, it’s better to show than to tell.
So I wanted to SHOW you — by “making a case” for inflation, instead of just saying “prices remain high.”
(That last sentence illustrates my point … it was a tepid statement of facts … and doesn’t have the “oomph” of an illustration that “a full 11% of income now goes to food — the most since 1991.”)
And that brings me back to our “would you rather” query: Would you rather own silver … or Costco?
I’m a “stock jockey” at heart. But I am a silver bug, too. So I’ve been busy in both fields …
My favorite game to play with Wealth Building stocks is the “Accumulate Game.” By that I mean … I establish an investment foundation in a stock that I like for the long haul. And then I “accumulate” my way to wealth … adding to my stake as shares get cheaper … and stand pat when they’re expensive.
If I had the “accumulate” option … Costco is the kind of stock I’d accumulate my way into. For a couple of reasons:
Prices Are High: Experts keep focusing on how inflation is decelerating. Decelerating, yes, but not going away. That means prices will keep rising — but at a lower rate. Prices are high, baby, and they ain’t going back. Consumers feel especially stung by food and gasoline, two of Costco’s basic offerings. Over time, the company’s membership model will benefit from this.
Costco’s Digital Business Is Scorching Hot: The online business — a major growth initiative for the company — is rolling. One reason: The precious-metals sales. It was a brilliant move. And the results “show me” it’s having an impact.
My Family Is Getting a Membership: I was working on this story (but hadn’t mentioned it to my family) when I heard my son Joey ask my wife Robin: “Can we go to Costco?” That’s synchronicity in action. And it “showed me” the very type of thinking that’ll build the company’s subscription ranks. (The timing sure was fortuitous; as my Dad used to say: “Clean leaving pays, Willy; clean living pays.”)
But the game here is either/or – making an all-in investment right now. And that’s okay, too. I’ll grab that share of Costco — and play the long-run Wealth Builder game.(And I’ll look to add to that on pullbacks. Like I said … it’s my game, and I’ll play how I want to.)
I’d love to hear YOUR take in the comments below. We want YOU to be a contestant in our SPC game of “Would You Rather?”
So … silver, or Costco?
See you next time;
I'm gonna go with the metal over the paper. That said - I would buy a "basket" of metals (gold, silver, copper, etc.) rather than silver alone.
It's an interesting choice, since COST and silver are two very different types of assets. No doubt Costco is a thriving company. But I think Peter makes a good point with the lofty P/E, especially for a discount retailer. To that I'd add that the analyst consensus one-year price target is only about 8% higher than the current price. And those targets are often overly optimistic. On the other hand we have silver, which stands to benefit from the persistent inflation we've seen -- and which doesn't appear to be going away any time soon. Plus, as Peter says, silver is trading well below its all-time highs. If I had to pick one today, I'd go with the silver coin.