Between Costco and Target, which is the better retail stock to buy?

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The retail industry is expected to benefit from the high inflation. Investors will be trooping to retail stocks in an attempt to gain an edge on the market. Two of the stocks that would be considered are Target Corporation (NYSE:TGT) and Costco Wholesale Corporation (NASDAQ:COST). Zacks ranks Target as a strong buy and Costco as a buy.

Fundamentally, it would appear that Costco and Target have similar prospects. An assessment of the stocks’ valuations reveals significant differences. Costco is trading at a market price of $558.11, while Target is trading at a price of $217.04. Prices show a huge difference but alone do not say much about the stocks.

The price/earnings to growth ratio (PEG) of Costco stands at 4.84 while that of Target is at 0.91. A PEG ratio of 1 shows that a business is valued fairly. If the ratio is above 1, it means the shares are overvalued, while a ratio below 0 is an indicator of a business being undervalued. The closer to zero, the better. Based on the PEG ratio, we confirm that Target is a better buy.

Target has higher total returns than Costco over the years

Source – TradingView

From a technical analysis perspective, Target returned 148% since September 2019, while COST earned 139.4% over the same period. On the pricing of Target, the analysis shows that bullish momentum is building, confirmed by both MACD and RSI momentum indicators. We, therefore, think that Target is a better buy as compared to Costco.

Summary

The retail industry will record growth this year. Both Target and Costco will record revenue growth and therefore be in demand. However, Target is a better buy given the higher rate of return in the markets and strong fundamentals, as demonstrated by the PEG ratio.

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