Costco is a compelling investment opportunity, but this stock could be an even better buy

There is a reason Costco Wholesale (NASDAQ: COST) is one of the most beloved stocks in retail. Its membership model prints reliable, high-margin profit, its renewal rates sit above 90%, and it keeps opening warehouses around the world.

Costco is a genuinely compelling investment. But it is also expensive, and I think a smaller rival running the same playbook could be an even better buy today: BJ's Wholesale Club (NYSE: BJ).

Why Costco is so compelling

Costco's magic is that it barely relies on selling merchandise for profit. It makes its money on membership fees, a recurring and sticky revenue stream that holds up in any economy. With more than 900 warehouses worldwide and members who almost never leave, Costco is a dependable compounding machine. The only knock is the price tag. The stock trades at a rich premium, which means a lot of future success is already baked in.

Why BJ's could be an even better buy

BJ's also runs the warehouse-club model, charging annual fees for access to bulk goods and cheap gas, and its membership income is growing at a healthy clip near 10%. Here is the key difference: scale. BJ's operates roughly 263 clubs, mostly in the eastern United States, versus Costco's more than 900. That smaller base is the opportunity, because BJ's has far more room to grow relative to its size. Its recent push into new markets like Texas is running well ahead of plan, and each new club it opens moves the needle far more than a new warehouse does for a company of Costco's size.

Just as important, BJ's trades at a meaningfully cheaper valuation than Costco. You get the same attractive membership economics, a longer runway of store expansion ahead, and a friendlier entry price. For an investor focused on growth, that combination can translate into better returns.

The catch worth naming

I would not pretend that BJ's is the higher-quality business. Costco is more proven, more global, boasts stronger renewal rates, and has a wider moat. BJ's is regional and more concentrated, its margins are thinner, and after a strong run, its shares are no longer dirt cheap on their own history. This is the higher-upside, higher-risk pick, not the safer one.

If you want the bluest of blue chip retailers, Costco remains a wonderful, if pricey, choice, and there is nothing wrong with owning it. But if you are hunting for the better value with more room to grow, BJ's Wholesale offers the same winning membership model at a fraction of the size and a lower price. To me, that makes it the more compelling buy right now, as long as you are comfortable with a smaller, regional challenger still proving how far it can expand.

Micah Zimmerman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.