Amazon, Costco and Walmart Stock Edition

U.S. retail is a multi-trillion dollar industry and a pillar of the American economy. Amazon (NASDAQ: AMZN), Walmart (NYSE:WMT)AND Costco Wholesale (NASDAQ: COST) they are industry giants and world-class stocks that have outperformed the broader stock market over the years.

These companies generate an astonishing $1.5 trillion in annual revenue. Their size gives them a cost advantage over their smaller competitors, and they will continue to grow in the coming decades.

However, their holdings are not created equal. While all three are blue-chip stocks, their differing prices give investors a lot to consider. One of these stocks is a buy, one is a hold, and the other is a sell. Scroll down to see which is which.

Buy: E-commerce giant is operating at full speed

Amazon has become the dominant e-commerce retailer in the United States. The company has amassed a whopping 37.6% market share, miles ahead of second-place Walmart. No other company has the supply chain capabilities to quickly deliver such a wide range of products to consumers, creating an unparalleled consumer experience. The Amazon Prime subscription service only strengthens the offer with streaming and other benefits.

But Amazon’s appeal extends beyond e-commerce; the company’s cloud platform is also a global leader. Amazon Web Services is a pillar of the digital economy and a cash cow that generates huge profits. Management invests those profits across the business to create future growth opportunities. It could be argued that no company is expanding more aggressively into new and existing markets than Amazon, which means the sky is the limit for its long-term investment potential.

Despite his history as a millionaire, Amazon’s stock is still somehow cheap. Amazon’s hefty growth investments mask the fact that the stock is at a decade low when we compare its operating cash flow with its share price. Meanwhile, analysts believe profits will grow by almost 30% annually for the next few years. Don’t hesitate to grab shares and hold them for the long term.

Sustain: America’s Largest Retailer Could Shine in Recession

Walmart is the largest retailer in America; about 90% of the country’s population lives within walking distance of a store. The company is known for its low prices, as well as for leveraging its enormous size and bargaining power. Walmart’s network of stores and its ability to reach shoppers have helped it grow. The company has expanded into other retail categories, including big-box stores, Sam’s Club, and e-commerce.

History continues

Unfortunately, Walmart stock isn’t as exceptionally valuable as its products might be. The stock currently trades at a forward P/E of 28. That’s a premium to the broader stock market, likely because of Walmart’s stellar reputation on Wall Street. The company has paid and raised its dividend for 51 straight years, and the fortress-like balance sheet backs it up. Plus, Walmart is likely to thrive in a recession as consumers abandon the competition and flock to Walmart to save money.

Analysts expect Walmart to grow for years, but estimates suggest long-term earnings growth averaging just over 7%. It’s hard to justify buying at that valuation when earnings growth is only in the single digits. Holding on to Walmart’s great fundamentals might not be a bad idea, but it’s probably best to avoid buying for now.

Sell: This Popular Big Box Retailer Is Pathetically Overpriced

This next section is almost painful to write, but you can’t ignore the facts. Look, Costco Wholesale is truly a great business. Its enormous size helps it offer products at low prices, and its famous loss-making products, such as the $1.50 hot dog meal, have created a cult and loyalty among those who shop there. The membership fee that consumers pay to shop at Costco is brilliant and a major source of profit.

But despite its fantastic business, Costco stock has become so expensive that it’s worth considering selling some of its shares. The company’s stock trades at a mind-boggling P/E ratio of over 52, even though analysts believe that earnings will grow just 9.5% annually over the long term. That seems doable, given Costco’s ever-expanding store footprint and ability to raise membership fees.

Almost 10% growth is nothing to ignore unless you’re paying over 50 times earnings. There is no margin of safety in the share price, which is a dangerous position if a recession hits and buyers begin to withdraw their portfolios. Instead of rolling the dice, consider selling and returning when the price makes more sense.

Is it worth investing $1,000 in Amazon now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Justin Pope has no position in any of the companies mentioned. The Motley Fool covers and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.

Buy, Sell, Hold: Amazon, Costco, and Walmart Stock Edition was originally published by The Motley Fool