The market has bounced in and out of bear territory over the past few months as investors assess conflicting signs of how the economy is evolving. Inflation is still high, and many consumer goods companies have hiked prices to offset costs. It is not surprising that the market is bearish in these conditions.
As a result, many great stocks have been stumped by shifting economic trends. But in time they will come back. Amazon (AMZN -6.80%), Costco Wholesale (COSTS 2.89%)and target (TGT 0.37%) are great companies that have beaten the market over time. So if you have $5,000 after paying off your debt and setting up an emergency fund, consider adding those stocks to your portfolio.
There is almost no end to what Amazon can do
Amazon continues to dominate domestic e-commerce while expanding its reach abroad. But while e-commerce remains its best-known business, its other businesses are growing at a rapid pace. In a few years, the company may look very different than it does today.
Amazon Web Services (AWS), which offers cloud services, is seeing strong growth despite the general economic slowdown. It’s been Amazon’s growth engine as retail slows amid inflation and supply chain issues.
Amazon has been acquiring companies for almost as long as it’s been in operation, but it’s accelerated acquisitions lately, and somewhat deviating from the norm, these acquisitions are largely unrelated to its core retail business.
The biggest acquisition of all time was Whole Foods in 2017, but the next biggest acquisition was MGM Studios in May for $8.5 billion and 1Life Healthcare, known as One Medical, for $3.9 billion in July. Both came at a time when retail was declining after the rapid growth seen at the start of the pandemic, and they represent a push into new business areas – notably streaming and healthcare.
Amazon has offered streaming under the Prime banner for many years, including original content. The MGM acquisition keeps it in the big leagues at a time when competition is intensifying. Buying One Medical is much further away. Amazon is revamping its healthcare services, and this is a springboard for more innovation.
Amazon has outperformed the market for many years, and while it underperforms in 2022, it has plenty of potential to outperform again — for years to come.
Ridiculously cheap prices promote customer loyalty
Costco is the only stock on this list to outperform the market this year, despite also being down.
It continues to see elevated sales growth as customers turn to its warehouses for the best prices available when inflation counts for every penny.
Revenue for the fourth quarter of fiscal 2022 (ending August 28) grew 15% year over year. Mid-to-high teens sales growth has gradually moderated as the impact of inflation on retail has increased and the first quarter of 2023 may look different. But growth remains robust.
Costco’s fee-based model allows them to charge dirt cheap prices while making big bucks. Aside from its price points driving volume and comps growth, Costco still has tremendous growth potential from new warehouse openings. The company operates 839 warehouses worldwide, including 578 in the United States. It typically opens around 25 stores a year, which is a slow pace compared to other retailers. That keeps the growth track nice and long.
Costco stock has provided investors with hefty gains for many years. Not only is it beating the market this year, but it’s also been the winner on this list for the last five years. Investors should expect this to continue.
The hybrid omnichannel champion
In a way, Target is the hybrid Amazon and Costco model, and carving out that niche has seen it tremendous success. It operates a discount model and is fairly ubiquitous, with more than 1,900 stores across the country. These stores are carefully tailored to the needs of specific communities, so rather than a one-size-fits-all, they work with multiple models that allow them to serve many different areas.
Just prior to the pandemic, the retailer remodeled its store to accommodate a robust range of omnichannel services and was therefore well positioned to deliver – both literally and figuratively. Its same-day services have been a lifeline for many customers, and Target has seen some of the highest sales increases of any major retailer powered by those services.
It’s worth noting that more than 95% of digital orders are delivered by stores. This means orders are dispatched faster and cheaper than if they came from distribution centers. It also means that even with increased stock levels, Target doesn’t rely on expanded warehouses like many other retailers who have invested to meet high demand.
So although it’s going through a bit of a rough patch, having been left with too much inventory when inflation soared and people stopped spending on expensive items, it maintains its strong infrastructure and should see good times again. Target stock has outperformed the market over time, and it’s a great stock to buy ahead of a market rally.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Target. The Motley Fool has a disclosure policy.