Best Stock to Buy Right Now: Target vs. Costco

Investors need to consider what they're getting when they buy a stock. That includes both the business itself and the price tag that Wall Street is awarding the business.

There's a difficult choice to make today if you're considering Target (NYSE: TGT), a struggling retailer, versus Costco (NASDAQ: COST), a thriving one.

Which one is the better buy?

Image source: Getty Images.

What does Costco do?

Costco is a club store, which means consumers pay a membership fee for the privilege of shopping at a Costco. Roughly half of the company's operating income is derived from membership fees, which allows the retailer to be aggressive with its prices.

Simply put, Costco can accept lower margins than most retail competitors and, thus, entice its customers to keep coming back with low prices.

The company's fiscal fourth-quarter 2025 same-store sales were impressive, up 5.7%. Digital sales rose 13.6%. Costco is hitting on all cylinders right now, which makes some sense, since consumers appear to be focused on getting the best prices they can find amid heightened economic uncertainty.

What does Target do?

Target is a more traditional retailer, utilizing a big-box format. It offers a wide selection of products, with a focus on providing customers with a more upscale shopping experience. That includes both product selection and store feel, but it comes with slightly higher prices than some of its competitors. That means Target is currently out of step with value-conscious consumers.

This fact is clearly evident on the company's income statement. Overall, same-store sales were lower by 2.7%. Digital sales growth was really the lone bright spot, up 2.4%. However, the company's physical stores more than offset that with a 3.8% same-store-sales decline. Consumers are voting with their feet, and Target's premium-tinted experience isn't what they're looking for right now.

What are you getting for your money?

The market has been volatile, and Costco's stock is currently down more than 15% from its 52-week high. That's not great, but the average retail stock, using SPDR S&P Retail ETF (NYSEMKT: XRT) as a proxy, is down around 10%. Target, meanwhile, is down 40% from its 52-week high and nearly 70% from the highs it reached in 2021. Investors are voting with their feet, too, and they've been dumping Target at a rapid clip compared to Costco.

Given the divergent performance of the two businesses, it makes sense that Costco's stock is performing relatively better than Target's. And if you're a growth investor, Costco's still strong business performance will probably be enticing to you. There's just one small problem on the valuation side of the equation.

Costco's price-to-sales, price-to-earnings, and price-to-book value ratios are all above their five-year averages even after the stock's price pullback. It is still on the expensive side. Growth stocks are often expensive to own, but Costco appears particularly pricey right now. Even growth investors will probably want to tread with caution here.

TGT data by YCharts

Target, meanwhile, looks cheap. Its price-to-sales, price-to-earnings (P/E), and price-to-book ratios are all well below their five-year averages. As noted, there's a good reason for the discounted price, but there's a little wrinkle here to consider.

Target is a Dividend King, with more than 50 consecutive years' worth of annual dividend increases. It's been through hard times before and survived them. It seems highly likely that Target will manage to do so again this time around, if history is any guide.

Notably, Target's trailing-12-month dividend payout ratio is fairly reasonable at around 55%. So the dividend doesn't look like it's at a huge risk of being cut right now. More aggressive dividend investors, along with value investors, will probably appreciate the lofty 5.3% yield on offer.

Different investors and different outcomes

Costco is a growth stock, but even after a recent pullback, it's still a historically expensive growth stock. It's probably best left on the wish list for most investors at this time. Target is a value stock working on a business turnaround. The risk is high as the company navigates a period of weakness, but if you can tolerate a bit of uncertainty, the valuation and yield are both attractive.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Target. The Motley Fool has a disclosure policy.