Sitting on Cash? These 2 Stocks Are Great Buys
The S&P 500 is less than 1% away from surpassing the high of 4,796 it hit on Jan. 3, 2022, which could mean a bull market is right around the corner.
A sell-off in 2022 caused the index to plunge more than 20% from its high, and we’ve been in a bear market ever since. However, many stocks surged last year thanks to easing inflation and excitement over burgeoning sectors like artificial intelligence (AI). The market is likely to continue on its current trajectory in 2024.
So if you’ve been sitting on some cash and waiting for the right moment, now could be a great time to expand your portfolio with stocks likely to flourish in a bull market. Here are two great buys this month.
Costco Wholesale (COST 1.43%) made headlines in December when it announced a special dividend of $15 per share that was paid out on Jan. 12. The company has become known for these surprise payouts, with the last one being $10 per share in 2020. Its regular dividend is fairly small, with a yield of 0.61%. However, consistent and significant long-term growth alongside these random cash surprises makes Costco’s stock an attractive investment.
This chart shows that since 2019, the company has significantly outperformed its biggest U.S. competitors in stock growth. Costco has won over consumers worldwide with its unique business model of charging an annual subscription fee for access to market-low prices in a wholesale setting.
Its membership-based business model has changed the game in retail. Product sales don’t actually amount to much in profits. However, in fiscal 2023 Costco hit more than $6 billion in profits, with membership fees making up 73% of that. Alongside a 90% subscription renewal rate, the company has a promising outlook.
Meanwhile, the company is rapidly expanding its global footprint. The retail giant currently runs 871 stores in 14 different countries. Yet it still has massive growth potential. In six of those countries, Costco has five or fewer locations, indicating plenty of room to expand before even venturing into new nations.
Over the last five years, Costco’s annual revenue has risen 59%, with operating income up 76%. However, the most impressive growth is in its free cash flow, which has soared 231% to nearly $9 billion, suggesting the company has the funds to fuel its international expansion and overcome potential headwinds.
Costco is an expensive option, with a forward price-to-earnings ratio of 43, significantly higher than the S&P 500 average of 22. However, the company has likely earned that high price tag with its considerable cash reserves, consistent growth, and a highly profitable business model.
While Costco is killing it on the brick-and-mortar side of retail, Amazon (AMZN -0.36%) is dominating the online sector. The company has leading market shares in e-commerce in multiple countries, with its share at 38% in the U.S. alone. Comparatively, the second-largest share is held by Walmart with 6% of the market.
Amazon’s command of online retail has even seen it unintentionally dominate other industries. For instance, the company was responsible for nearly 70% of all U.S. video game purchases as of September 2023. Amazon’s vast reach gives it the brand power and financial resources to expand to other lucrative markets like cloud computing and AI.
Moreover, the company has undergone extensive restructuring over the last two years with the goal of increasing profitability. Moves like closing dozens of warehouses, shuttering unprofitable projects, and thousands of layoffs have fortified its business and made it less vulnerable to macroeconomic headwinds. Since last January, Amazon’s free cash flow has skyrocketed 427% to $17 billion thanks to recent restructuring.
As a result, the tech giant is sinking billions into its most profitable business, Amazon Web Services (AWS). The cloud platform accounts for about 16% of the company’s revenue, yet brings in over 60% of its operating income. Meanwhile, the platform grants Amazon a powerful position in the budding AI market as businesses increasingly turn to cloud services to integrate the technology into their workflow.
Amazon’s stock is an exciting option as the company has growth catalysts in multiple markets. Its stock is up over 60% year over year. Yet it remains down about 17% from a high it achieved in July 2021, suggesting plenty of room for growth.
Additionally, the chart above shows Amazon’s price-to-sales ratio is one of the lowest in tech, indicating its stock offers the most value. So if you’ve been sitting on cash, Amazon is a screaming buy right now.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Costco Wholesale, Microsoft, Nvidia, Target, and Walmart. The Motley Fool has a disclosure policy.