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Big Boxes Are Back, and Costco’s a Winner

An opportunity may be coming to buy Costco Wholesale (NASDAQ:COST) stock. Investors are selling stocks in the biggest retailers, even as they report blowout…

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An opportunity may be coming to buy Costco Wholesale (NASDAQ:COST) stock. Investors are selling stocks in the biggest retailers, even as they report blowout earnings. If the pattern holds after Costco reports Dec. 9 earnings, you may be able to get some for Christmas.

Source: ilzesgimene / Shutterstock.com

As trading opened Nov. 19, Costco was the most expensive prize in the sector. At $535 per share, its market capitalization was $236 billion. It was selling at a 15% premium to sales, unheard of for thin-margin retail. Its price to earnings ratio was an eye-popping 47. That’s getting close to Amazon.Com’s (NASDAQ:AMZN) almost 70.

I’ll drive miles out of my way to go to Costco, blowing past a Walmart (NYSE:WMT) Sam’s Club without a glance. But I won’t pay that price for the stock.

Selling the News

There’s hope in the fact that investors are selling the best environment for big box retailers in decades. On Nov. 6, Walmart topped earnings estimates with a net income of $3.11 billion, $1.45 per share, on revenue of $140.5 billion. The market responded by sending the shares down.

The news from Target (NYSE:TGT) was nearly identical. The company smashed earnings estimates at $1.49 billion, $3.04/share, and revenue of $25.65 billion.  The stock sold off.

The excuse given by analysts came in statements from the companies that they would absorb price increases and prioritize market share. Scroogy analysts say investors want the customers gouged, given the limited competition. You’ve got them by the throat, they’re saying, squeeze.

That’s not how the big box rolls. Scaled retailing is about sales volume. As with Amazon, the key metric is operating cash flow. Walmart had $36 billion in operating cash flow in fiscal 2021, which ends in January. Target had $10.5 billion. Walmart is selling at just 11 times its 2021 cash flow number, while Target at just under 12 times.

COST Stock Is Stretched

Based on those metrics, Costco’s valuation is stretched. It had $9 billion in operating cash flow for fiscal 2021, which in this case ends in August. The COST stock is selling for over 25 times that.

But Costco margins are also wafer thin. Until a few years ago, its net income usually matched up with its membership fees but last year was unusual. Net income was 20% higher than the fees — but we’re still talking about just $5 billion in earnings on $195 billion in revenue. Just 2.5% of the money coming in is hitting the net income line.

This doesn’t mean the last person into Costco stock was an idiot. Over the last five years, Costco stock is up 250%. There’s also a dividend, which has climbed from 45 cents to 79 cents per quarter.

I was a fool to sell my own Costco shares a few years ago. Unless you’re a trader, looking for quick dopamine hits of profit, you may not want to sell here, either.

The Bottom Line

Analysts are expecting earnings of $2.59 per share and revenue of $47.5 billion when Costco next reports. If history, and the crowds at my local store, are any indication, it should beat those numbers easily.

Inflation is a boon to stores like Costco. When you buy big quantities, you get the best prices and the gas is cheaper than anywhere else, which is why there are gas lines at Costco in good times and bad.

If there’s a threat to Costco, it’s demographics. Younger consumers can’t afford their parents’ big homes. Many lack their parents’ big SUVs so they shop online and in limited quantities. Their numbers are growing, and their parents are dying off, or we’re downsizing ourselves.

But Costco still has years to adapt to any new retailing rules. Let it drop, then buy it.

On the date of publication, Dana Blankenhorn held a long position in COST. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays he has a collection of COVID-19 stories at the Amazon Kindle store. Write him at [email protected] or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.

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Economics

3 Oil Stocks to Watch Following the Biden Release Plan

Last month, U.S. President Joe Biden authorized the release of 50 million barrels of crude oil from America’s strategic reserves. It was an unusual move,…

Last month, U.S. President Joe Biden authorized the release of 50 million barrels of crude oil from America’s strategic reserves. It was an unusual move, but one that Biden took to help lower energy prices as winter arrives and Americans struggle with rising costs due to high inflation.

Before Biden announced the release, oil prices had been at a three-year high of more than $86 per barrel. The price of Brent crude oil has since fallen to just over $70 per barrel, suggesting that Biden’s plan is having an immediate impact (the Omicron variant of Covid-19 has also affected oil prices).

However, the strategic release has put pressure on oil producers and placed the U.S. government at odds with the Organization of the Petroleum Exporting Countries (OPEC+) and allies such as Russia that are a de facto cartel and had rejected repeated calls from Washington, D.C., to pump more oil and increase global output heading into the winter months.

Here are three oil stocks to watch following the Biden release plan.

Oil Stocks to Watch: ExxonMobil (XOM)

Source: Jonathan Weiss / Shutterstock.com

We’ll start with the largest U.S. oil producer, Irving, Texas-based ExxonMobil. One of the biggest companies in the world with annual revenues of nearly $180 billion and 72,000 employees worldwide. In 2020, ExxonMobil averaged more than 2.3 million barrels of oil per day, behind only Saudi Aramco and PetroChina (NYSE:PTR) in terms of production.

With brands that include Mobil and Esso, ExxonMobil is a force in the worldwide oil and gas business, with a global footprint. Since 2015, the company has discovered 18 oil fields off the coast of Guyana in South America that collectively hold more than eight billion barrels of oil.

In terms of its stock, after a difficult 2020, shares of XOM have risen 51% year-to-date and now trade at just over $62 each.

Chevron (CVX)

chevron stockSource: LesPalenik / Shutterstock.com

Next, we come to the second-biggest U.S. oil company, and the only one that famed investor Warren Buffet owns, Chevron.

Headquartered in San Ramon, California, Chevron today has a presence in 180 countries around the world and is involved in every part of the oil business, from exploration and extraction to refining and transportation.

It is Chevron’s diversification within the industry that is reportedly what Buffett likes about the company. In fact, the “Oracle of Omaha” added to his stake in CVX stock during this year’s third-quarter. Year-to-date, Chevron’s stock is up 40% at $118.30. Although most of those gains were achieved in the first quarter, in the past six months, the share price has risen 9%.

Oil Stocks to Watch: Shell (RDS.A)

The Royal Dutch Shell (RDS.A, RDS.B) logo on a gas station in Iceland.Source: JuliusKielaitis / Shutterstock.com

The company has dropped “Royal Dutch” from its name, but Shell remains the biggest oil company, and largest company in all of Europe. Now co-headquartered in The Hague, Netherlands and London, England. Following a tax skirmish with the Dutch government, Shell today produces about two million barrels of oil per day.

Like Chevron, Shell is involved in both upstream and downstream aspects of the oil industry with 86,000 employees globally. As mentioned, Shell has been undergoing several brand and corporate changes this year after it fought with the Dutch government over royalty taxes and was accused of hiding billions of dollars in offshore tax havens. Year-to-date, RDS.A stock is up 27% at $45 per share, including a 10% gain over the past six months.

On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.  

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Economics

Even if You’re Bullish on the Metaverse, Tread Carefully With Decentraland

Since hitting an all-time high of $5.90 per token on Thanksgiving, Decentraland (CCC:MANA-USD) has been sliding. The same thing’s going on with other…

Since hitting an all-time high of $5.90 per token on Thanksgiving, Decentraland (CCC:MANA-USD) has been sliding. The same thing’s going on with other metaverse-themed cryptos. For example, The Sandbox (CCC:SAND-USD). After spiking on Nov. 24, it’s been falling back in price as well.

Source: Lichi / Shutterstock.com

With this sell-off in “metacoins,” traders are clearly taking profit. But is this also a sign that “meta mania” has peaked?

It’s possible. Sure, unlike with other manic crypto run-ups seen this year, like the “pupcoin mania” that sent Shiba Inu (CCC:SHIB-USD) “to the moon,” there’s at least a bull case to be made when it comes to MANA-USD’s utility.

Then again, the market may have gone overboard with pricing-in increased usage for metaverse cryptos. Facebook’s corporate rebranding of itself as Meta Platforms (NASDAQ:FB) of course has played a big role in this. Yet, just because Mark Zuckerberg is betting his company’s future on this being the “next big thing,” doesn’t mean Decentraland’s platform, which runs on the Ethereum (CCC:ETH-USD) blockchain, will end up becoming the one that’s most widely used.

In short, approach cautiously, as it may continue to drift lower.

Has Decentraland Peaked in Price or Just Taking a Breather?

With MANA-USD’s drop after its recent spike in price, my gut reaction is that this is a bubble in the midst of deflation. However, I will concede that we may not have reached the top with this, and other metaverse-themed cryptos. As argued by crypto investment firm Greyscale in a recent report, the metaverse is a $1 trillion annual revenue opportunity. Virtual property has become a serious business.

It may still seem absurd that real money is being pumped into a “fantasy world.” But given how cryptocurrencies went from the fringe to the mainstream in the span of a decade, I wouldn’t discount the chances metaverse platforms become a noticeable part of everyday life. As this trend plays out, and platforms like Decentraland grow in usage then there’s possibly some growth opportunities here.

Its native token could in the coming years become worth far more than what it’s worth today. Taking all this into account, buying MANA now, while it pulls back, could be a highly profitable move in hindsight. It could be like buying Bitcoin (CCC:BTC-USD) in the mid-2010s, or like getting into Ethereum between 2018 and 2020.

On the other hand, that may not be a wise bet because a move into the CoinMarketCap’s Top Ten is not set in stone. Much less, making its way to the level of a Bitcoin or Ethereum.

Why ‘MANA Mania’ Could Fizzle Out

The metaverse may be less of a fantasy than it appears on the surface. Yet that doesn’t mean Decentraland stands to rise to even higher prices. Nor does it mean that it will be immune from a big drop in price.

First off, this specific metaverse platform is far from being the largest one out there. As my InvestorPlace colleague Alex Sirois recently discussed, The Sandbox is a formidable competitor. Not only that, it has also seen in the past week a far greater volume of virtual land sales compared to Decentraland’s platform.

As metaverse platforms rise in popularity, chances are new competitors will crop up. A technologically more advanced, and better-capitalized, metaverse could emerge, leaving this one in the dust.

Besides the risk that it fails to rise in value further in the long run, there’s still the risk my above-mentioned “gut reaction” is on the money. “MANA Mania,” kicked off by the Facebook/Meta news, may have run its course. Just like what happened to “pupcoins” after they stopped being the flavor of the month, MANA and its “metacoin” peers could see big declines from here.

The Best Move Today with MANA-USD

The jury is still out whether the metaverse is a flash in the pan trend. There’s much to suggest it won’t wind up as one. But like I discussed in my last article, Facebook involvement notwithstanding, it’s not guaranteed metaverse platforms will ever gain critical mass.

Adding to this, is the uncertainty of whether this particular platform will be widely used when metaverse goes mainstream. Its rival The Sandbox, or perhaps a rival that hasn’t even started yet, could end up dominating the space. This will make it harder for MANA-USD to see much long-term price appreciation. To top it all off, besides the risks of buying it as a wager on its user growth, is the risk that “metacoins” drop, as traders chase the next hot trend.

Between the risk of pulling back further in the short-term, and its debatable long-term potential, be careful with Decentraland right now.

On the date of publication, Thomas Niel held long positions in Bitcoin and Ethereum. He did not have (either directly or indirectly) any positions in any other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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Economics

7 Stocks to Buy as Biden Picks Powell For Fed Chair

It’s official. Jerome Powell will serve a second term as Federal Reserve chairman. With that in mind, it’s a good time to consider what effect Powell’s…

It’s official. Jerome Powell will serve a second term as Federal Reserve chairman. With that in mind, it’s a good time to consider what effect Powell’s reappointment will have on stocks to buy as we head into 2022.

Powell’s selection didn’t rise to the level of white smoke coming out of a chimney at the Vatican. In this case, there were only two choices — and investors had signaled their preference.

That was Powell. The reason is simple enough. One of the Federal Reserve’s primary responsibilities is to limit inflation, and recent economic data show it is rising at an uncomfortable level. With that in mind, Powell has a proven tendency to move at a measured pace. He gives investors clear signals when he intends to make moves.

That’s why the Fed Chair’s announcement that he may increase the pace of tapering caught investors off guard. The sooner the Fed takes its asset purchases down to zero, the sooner it may consider raising interest rates. However, if this program goes as scheduled, it may create an opportunity for long-term investors.

That’s why, on balance, investors are probably still bullish about Powell. So without further ado, let’s take a look at seven stocks to buy with Jerome Powell leading the Fed. These picks have received a bullish 12-month price target from sell-side analysts:

  • JPMorgan Chase (NYSE:JPM)
  • PayPal (NASDAQ:PYPL)
  • Visa (NYSE:V)
  • Southwest Airlines (NYSE:LUV)
  • T-Mobile (NASDAQ:TMUS)
  • Lamb Weston Holdings (NYSE:LW)
  • Cigna (NYSE:CI)

Stocks to Buy: JPMorgan Chase (JPM)

Source: Roman Tiraspolsky / Shutterstock.com

Bank stocks will logically be a solid buy if interest rates rise sooner than expected. And if that’s the case, investors will likely seek out quality names like JPMorgan Chase. As of June 30, the bank had $3.7 trillion in assets and operations worldwide. And as the economy continues to recover, JPMorgan should see its lending revenue increase in concert with tapering slowing down.

Since the bank’s earnings report in October, several analysts have been raising their price target for JPM stock. The consensus 12-month price target suggests a modest 8% gain. However, that would likely move much higher if the Fed raises rates in the next year.

But let’s say the Fed decides to hold the line on interest rates. Well in that case, if you’re an investor who’s concerned about inflation, JPMorgan Chase’s dividend, which currently carries a 2.53% yield (that works out to a $4 per share annual payout), is certainly a nice buffer against the effects of inflation.

PayPal (PYPL)

PayPal logo and front of headquarters

The second pick on our list of stocks to buy is PayPal. Current shareholders have had a rough several months, as PYPL stock recently went from a 52-week high to a 52-week low.

There are many reasons for that. Some analysts may have been troubled when PayPal missed on revenue for the second straight quarter. But most of the issues seem to center around an overall bearish sentiment surrounding tech stocks.

I can’t speak to the latter point. However, as to the revenue miss, I can understand that analysts had become accustomed to PayPal beating revenue numbers. And some believe PayPal will be a loser as consumers begin to return to in-person shopping.

However, I think that’s overstated. PayPal already has tools in place, such as debit and credit cards, that make it possible for users to use their PayPal account for in-person purchases.

With that in mind, the selloff in PYPL stock is now looking extreme. And the analyst community seems to agree. The stock has a $275 price target, which gives it a 44.5% upside from its current price.

Stocks to Buy: Visa (V)

several Visa (V) branded credit cardsSource: Kikinunchi / Shutterstock.com

If you’re looking for a more traditional payment processor, look no further than Visa. Recent data suggests that many consumers appear ready to use their credit cards this holiday season. Specifically, a recent article in the Wall Street Journal reports that approximately one in four Americans applied for a new credit card in the last 12 months.

That means even if consumers pay their balances in full (which is still encouraged), Visa will still be able to collect a transaction fee. And that means revenue is likely to go up the next time the company reports earnings in January. This is also before Visa increases its swipe fee, which it is likely to do in 2022.

The stock has a price target of $276, which is a 33% upside from its current price.

Southwest Airlines (LUV)

a southwest airline stocks (LUV) jet flying above the cloudsSource: Carlos E. Santa Maria / Shutterstock.com

The next two stocks to buy may fall under the category of, “if you could only buy one.” The first is Southwest Airlines. Among the airline stocks, LUV stock has a $61 price target, which gives it a 32.6% upside from its current price.

Of course, as I write this, the country is trying to determine how serious the threat of the Covid-19 omicron variant will be. At this time, President Joe Biden’s administration is saying there will be no mass lockdowns. But in the short term, there may be some turbulence in a sector that was hoping for clear skies.

Southwest has not been immune to the staffing problems that have led to flight cancellations. And with oil prices back on the rise, the company is experiencing higher costs for jet fuel. However, one reason I’m partial to Southwest is that the airline does not rely on international travel, which is likely to remain a mess for some time yet.

Stocks to Buy: T-Mobile (TMUS)

the exterior of a T-Mobile (TMUS) branded storeSource: Tupungato / Shutterstock.com

T-Mobile was one of the strongest recovery plays of 2020. TMUS stock climbed approximately 80% from its pandemic low. But it’s been a different story in 2021 with the stock down 13.6% year-to-date (YTD). And there are some that believe wireless carries may continue to face tough conditions in 2022.

However, analysts expect T-Mobile to continue to add subscribers, particularly as it continues to benefit from its merger with Sprint. This merger has given the company access to the all-important mid-band 5G spectrum. Not only is this a “Goldilocks” solution of sorts from a technology standpoint, but it’s allowed the company to build out its 5G network while its competitors are still stuck on the starting blocks.

T-Mobile is also hoping to boost revenue by limiting some device promotions to its high-end service plan. The goal is to give customers an incentive to upgrade their plans.

Early results suggest the plan is working. That’s part of the reason that the company has a 12-month price target of $168, which is an upside of 45%.

Lamb Weston Holdings (LW)

LW stock: a bag of potatoes open with potatoes spilling outSource: Shutterstock

Lamb Weston Holdings has been one of the companies most affected by inflation. The purveyor of frozen potato products has seen its stock price drop nearly 29% YTD. And much of that drop has occurred since June. Not helping matters is the company’s October earnings report, in which the company missed on both the top and bottom lines.

However, analysts are optimistic about the company’s fortunes in the next year. LW stock has a price target of $71, which would be a gain of 26.8% and would recover much of what the stock has lost in the last year.

That recovery may be underway. The stock appeared to hit a level of support on Dec. 1 and has started to bounce higher. Investors will want to see additional confirmation, but for now Lamb Weston looks ready to move higher.

Stocks to Buy: Cigna (CI)

mobile phone screen with the cigna (CI) logo on it. representing healthcare stocks to buySource: Willy Barton / Shutterstock.com

Cigna closes out our list of stocks to buy. Buy-and-hold investors have watched CI stock move to a 52-week high only to lose all those gains and start trading near its 52-week low. The trend continued even after the company recorded a double beat in their most-recent earnings report.

This seems overdone. Cigna is one of the largest global health insurance companies, and it has contracts with 99% of U.S. pharmacies. It also has a significant presence in the pharmacy benefits manager (PBM) space, which gives it leverage when it comes to drug pricing.

However, like Lamb Weston, it appears that CI stock has hit a level of support and it could be ready to move significantly higher. In fact, analysts forecast that Cigna will hit a 12-month price target of $268, which would be a 28.4% gain from the stock’s current level.

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.

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Author: Chris Markoch

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