2 Reasons The Case For Costco Got Stronger Today

In Summary

  • Target showed us that there has been no immediate impact from the Amazon and Whole Foods merger.
  • This merger, on its own, took $30 off Costco’s share price.
  • We made a comprehensive case for why Costco was a good buy just several days ago.
  • That case is strengthened by Target’s recent results and Costco’s June sales.
  • It is further strengthened by the potential for government intervention in preventing Amazon from getting too large.

Target’s (NYSE:TGT) increased its guidance today after suffering a similar fate that as many grocers did over the past two weeks. This is not only a sign that the Amazon (AMZN)-Whole Foods (WFM) merger isn’t having an instant impact on the space; it could also be a sign that any type of profound impact to retail may be far off. We want to take this morning’s news, put it in context and present a small update as to why this helps drive forward the case for one of our favorite retailers, Costco (COST).

As you can see in the above chart, the retail sector has been hit hard over the last month on the news that Amazon was going to expand into retail on the brick-and-mortar front. We found many of these knee-jerk reactions to be unnecessary and overdone and we thought they created some substantial buying opportunities. In this article that we wrote right after the merger was announced, we stated when buying Target,

We got a good price and were able to get some shares under $50 and we think the bearish effect of Amazon acquiring Whole Foods is still going to be a couple of years out. That will give these other retail and grocery companies a chance to make significant changes on their own and it will give them a few more years to generate steady cash, which is what Target has done for a long time.

We believe that all of these retail names are attractively priced after Friday’s sell-off. Amazon acquiring Whole Foods may not even have any type of profound effect on the market for many years to come. Even then, stores like Wal-Mart and Target could move to launch competing “in house delivery” products. Companies like Costco already offer free shipping. Just because Amazon now owns Whole Foods doesn’t mean that we’re going to see some seismic shift in the retail landscape.

 Source: Seeking Alpha

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