Better Buy for Cautious Investors: Eli Lilly vs Costco

Investors piled into growth stocks in recent years, particularly in the area of artificial intelligence (AI), and this movement offered the overall market enormous momentum. The S&P 500 soared into a bull market, and the famous benchmark reached multiple record highs amid this optimism.

The bull market continues, but today, investors are feeling more hesitant than they were earlier in this growth story. A series of headwinds has weighed on stock performance periodically -- from concerns about the general economic backdrop amid rising inflation to worries that companies may be spending too much on AI infrastructure development. Though S&P 500 earnings soared in the recent quarter, and demand for AI remains high, some investors today favor caution.

And this brings me to the following question: If you're looking for a certain level of safety today, which stocks should you buy? Pharmaceutical players and some consumer-related names could be the answer as people rely on their products regardless of the economic situation. Two winners that come to mind are Eli Lilly (NYSE:LLY) and Costco Wholesale (NASDAQ:COST). They both make great additions to a portfolio looking for security. But if you could only buy one, which is the better buy right now? Let's find out.

Image source: Getty Images.

The case for Eli Lilly

Often, pharmaceutical companies don't exactly make headlines. They work in the background, producing medicines recognized by doctors and patients. But Eli Lilly has stood out in recent years thanks to a type of product that's on the general public's radar screen: the GLP-1 weight loss drug.

Lilly leads the market with about a 60% share in the U.S. as it sells Mounjaro and Zepbound. These products, the former approved for type 2 diabetes and the latter for weight loss, have driven revenue growth in recent years as patients rushed to get in on them. In the recent quarter, for example, Mounjaro and Zepbound generated more than $14 billion in revenue.

It's likely this growth will continue as the weight loss drug market is expected to reach nearly $100 billion by the end of the decade. And Lilly's latest approval, weight loss pill Foundayo, and its late-stage pipeline could keep it in the lead. On top of this, Lilly has a broad portfolio of products across treatment areas, so the company doesn't depend on just one specialty. All of this translates into a certain level of revenue throughout market environments.

The case for Costco

Costco offers shoppers fantastic deals on items they need most, from groceries to gas, and because of this, shoppers may rush here even more frequently when times are tough. The company is able to offer such prices because it doesn't need to generate high margins on these goods -- instead, Costco makes most of its profit through membership fees.

This is great for a number of reasons. First, as mentioned, it means the company doesn't have to rely on product markups -- something that may push away customers -- to drive profit growth. Second, membership fees are high-margin as the signing on of a new member doesn't cost the retailer much, just the production of a membership card. Finally, this business model offers investors visibility on revenue to come, particularly since Costco's membership renewal rates are high, topping 90% in the U.S. and Canada.

Finally, Costco is known for paying special dividends every few years, with the latest being $15 a share in 2024. Investors who like passive income may appreciate these payments, especially during uncertain market times.

Which stock is the better "cautious" buy now?

As I said earlier, both of these stocks make great additions to a portfolio, and they offer investors a certain degree of safety, even during a tough economy. But if you could only buy one right now, which is the best choice?

For this, let's take a quick look at valuation. Lilly and Costco have seen valuation come down over the past couple of years.

LLY PE Ratio (Forward) data by YCharts

But at about 39x forward earnings estimates, Costco represents an opportunity. It has generally traded above this level, while in recent times Lilly has traded around its current level. Both of these stocks are reasonably priced today and make great "safe" buys for the cautious investor -- if you could only buy one, though, I would go for Costco.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Eli Lilly. The Motley Fool has a disclosure policy.