Best Stock to Buy Right Now: Costco vs. Home Depot

I'm certain that many readers have shopped at either Costco Wholesale (NASDAQ: COST) or Home Depot (NYSE: HD) -- or both -- at least once. These two retailers have generated combined revenue of $407 billion in their latest fiscal years. And over the long term, they have both generated strong returns for shareholders.

If we view things with a fresh perspective, which of these top retail stocks is the better one to buy right now?

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A minimal threat of disruption

Investors looking for businesses they could hold for the long haul should prioritize companies that have staying power -- ones that face a minimal threat of disruption. Costco and Home Depot fit the bill here.

These two brick-and-mortar retailers have been around for decades, essentially doing the exact same thing they have always done. For investors, this is compelling because it adds a level of predictability and stability.

Contrast that with the constantly changing tech landscape, where making long-term bets can be difficult because it's hard to know how things will shake out. What's more, top talent and huge amounts of capital flow to tech-driven industries, making competition intense.

That's not the case with the retail sector, particularly for a warehouse club operator like Costco or a home improvement chain like Home Depot. Their dominant industry positions discourage new entrants.

These two companies aren't remaining static, either. It's quite the opposite approach: Costco and Home Depot have e-commerce operations. And they both use technology in various ways to improve their operations.

Nonetheless, I would argue that both businesses will still be around 50 years from now, doing what they currently do.

One thrives, one struggles

These two companies should be on every investor's watch list based on their staying power, but they're operating on different wavelengths.

Costco's business is humming along nicely. Net sales rose 5% in fiscal 2024 (ended Sept. 1, 2024).

And it expanded its membership base by 7.3% year over year to 76.2 million in that 52-week period. During the fourth quarter of 2024, the company reported an impressive 90.5% worldwide renewal rate, indicating strong customer retention.

Those memberships provide a high-margin revenue stream for Costco, driving financial performance despite selling merchandise at very low margins. Plus, they encourage customer loyalty and repeat purchases.

At the same time, Home Depot has hit a bit of a rough patch. Because the business operates adjacent to the housing market, it's been hurt by higher interest rates and the inflationary pressures facing consumers in recent years. Same-store sales are expected to dip 2.5% in fiscal 2024, which ends in a few weeks.

But Home Depot is the clear leader in its industry, a market that management estimates to be worth $1 trillion. An aging housing stock, coupled with a shortage of housing inventory, should support long-term demand. It also helps that interest rates have been coming down.

Pay attention to valuation

One crucial variable to consider is a stock's valuation. As of this writing, Costco shares trade at a price-to-earnings ratio (P/E) of 54. The stock has rarely been more expensive in its entire history. That leaves investors with a zero margin of safety.

Most readers would agree that Costco is the superior business out of these two, since it keeps reporting solid financial results no matter the economy. However, paying more than 50 times earnings, no matter how great the company is, looks like a clear mistake. Expectations remain elevated, with the investment community viewing the business very optimistically.

Home Depot, on the other hand, trades at a P/E of 26. Investors have to be patient for things to improve, but this stock is the better buy.

Should you invest $1,000 in Home Depot right now?

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Home Depot. The Motley Fool has a disclosure policy.