Institutions Think This Consumer Stock Could Break Higher

Key Points

• The Fed's pivotal moment is creating a 'risk off' shift for Wall Street, now looking for the highest growth at the safest rate. 
• PriceSmart has become one option for this strategy. It is considered a consumer staples name set to grow its EPS at above-industry-average rates. 
• Goldman Sachs bought it in the past quarter, and price action suggests valuations could bring the stock to a much higher ceiling. 

Markets are preparing for the coming interest rate cycle proposed by the Federal Reserve (the Fed). Though most sectors have priced in this potential pivot, some have yet to reflect this trend higher. Over the past six months, the Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY underperformed the broader S&P 500 by as much as 11%.

Other sectors, such as technology stocks, outperformed the S&P by more than 5% during this period. Led by the all-time highs in names like Nvidia Cor. NASDAQ: NVDA, this cyclical shift has left much room for consumer discretionary stocks to catch up.

With U.S. consumer sentiment reaching levels not seen since 2021, Wall Street institutions like The Goldman Sachs Group Inc. NYSE: GS and the Vanguard Group saw fit to investigate the space. After bumping its position in PriceSmart Inc. NASDAQ: PSMT by 14.9% in the past quarter, Goldman’s $2.2 million investment gives Main Street lots to consider.             

PriceSmart: A Costco in Disguise

While not as big as its primary business model competitor, Costco Wholesale Co. NASDAQ: COST, PriceSmart’s $2.5 billion market capitalization allows it to grow much faster than Costo and its $316 billion capitalization.

Investors can see this play out in both companies’ financial quarters. Costco reported sales growth of 6% in the second quarter of 2024, while PriceSmart’s earnings presentation shows growth of 10.7% during the past 12 months.

Money managers may shift their preferences to stocks that offer above-average growth in the coming quarters. Because traders think that the Fed could cut interest rates in May or June 2024, a trend spotted in the FedWatch tool offered by the CME Group Inc. NASDAQ: CME, the window for preferential treatment is closing.

What is better than a stock offering discretionary and consumer staples products? A stock that does all that can still grow its earnings per share (EPS) by 19% over the next 12 months. Because PriceSmart’s business model is relatively interchangeable with Costco’s, Wall Street may prefer this EPS growth over Costco’s 9.4%.

This EPS gap could be one reason PriceSmart stock outperformed Costco by nearly 6% over the past 3 months. Also, markets think it could keep going higher to break out of its $75 to $85 price channel.

Price action considered, PriceSmart pushed out an 18.2% rally in the past year. In comparison, the variety store industry only managed to increase by 2.3%.

Valuations Could Use a Boost

On a price-to-book ratio spread, PriceSmart becomes the most attractive buy target. The stock’s 2.4x P/B ratio falls into an 85% discount to Costco’s 15.6x valuation despite being set to grow its EPS by more than double the rate.

Another worthy mention in the space is Target Co. NYSE: TGT, which can be bought at a 6.1x P/B ratio. This valuation gives PriceSmart the upper hand, as it is discounted by 61% to Target’s multiple.

There is a clear reason for this discount, which is also the same reason PriceSmart’s valuation could be higher. According to the company’s financials, Target's gross margins are 27%. PriceSmart, which sacrifices profits to serve a larger audience, operates on gross margins of 17% only.

Of course, this dynamic would make Target a better proposition any day, but these aren’t regular times. As more and more Americans battle with stubborn inflation, alternative shopping places like PriceSmart could become the answer anyone is looking for.

Thinking the stock could see better days, the Vanguard Group joined Goldman in its 4.5% boost to its PriceSmart position, approximately $11.3 million as of March 2024.

As the volatility index (VIX) broke out to above 16%, a level not seen since October 2023, investors could be starting a ‘risk off’ rotation, giving PriceSmart’s model an opportunity to rise to the occasion and beat its much larger peers.

Because PriceSmart operates in a relatively noncyclical sector but is still set to grow its EPS above the 13% average for the space, short interest on the stock declined by 9% in the past month.

The stock now trades at a new 52-week high and is flirting with prices not seen since 2022 for what could become a more extended uptrend. Because the company reported 18% EPS growth in the latest quarter, analyst projections for 19% could potentially set the stock up for an earnings beat, the speculative thesis behind Wall Street’s buying.