Billionaires are selling Costco. These two retail stocks are better buys.

Costco wholesale (COST -1.75%) is one of the best performing stocks in the retail sector.

Shares of the membership-based warehouse chain have risen more than 600% over the past decade, and the company continues to expand both through new stores in the U.S. as well as by increasing same-store sales and expanding its e-commerce business.

Despite this success, however, there are good arguments that Costco is now overvalued. The stock trades at a price-to-earnings (P/E) ratio of 56, about double that S&P 500 Index.

You don’t have to agree with me when rating it. Top billionaire investors sold the stock in the second quarter. That includes Ray Dalio’s Bridgewater Associates, which sold 94,000 Costco shares in the second quarter, worth nearly $80 million at the time.

Meanwhile, Ken Griffin’s Citadel Capital sold 124,000 shares, or about $100 million. Although Costco’s business looks strong, these two hedge funds have likely concluded that the company’s valuation is stretched.

If you’re thinking about leaving Costco, here are two retail stocks worth moving into.

1. Home Depot

Home Depot (HD 0.71%) is the nation’s largest home improvement retailer.

While Costco stock has continued to rise since the pandemic, Home Depot has struggled with the housing market slowdown and the stock is still trading below its all-time high set in 2021.

However, Home Depot appears to be well-positioned to continue rising from here. First, the Federal Reserve has begun its rate-cutting cycle, cutting the federal funds rate by 50 basis points last week.

Falling interest rates should help stimulate the housing market, reduce mortgage interest rates and monthly payments, and mitigate the lock-in effect of low mortgage rates. It also lowers interest rates on home equity loans and home equity lines of credit (HELOC), encouraging renovations and other home improvement projects.

Home Depot is also poised to benefit from the recovery thanks to its acquisition of SRS Distribution, a leading building materials retailer, earlier this year. This deal helps Home Depot further vertically integrate, closer to its professional customers, and expands its addressable market by an estimated $50 billion.

Home Depot stock now trades at a P/E ratio of 27. That may seem expensive, but earnings growth should recover as the housing market recovers.

2. Goal

Goal (TGT -0.51%) has also been having problems lately, but for different reasons than Home Depot.

Because Target is primarily a discretionary retailer, it has been hit by the slowdown in consumer spending as well as internal issues like theft, but the company now appears to be overcoming these and business is moving in the right direction.

Inflation now appears to be under control and falling interest rates are also likely to boost consumer spending.

Recent challenges have also helped Target’s profits recover significantly, as its second-quarter results show. Gross margin increased to 28.9% from 27% in the year-ago quarter due to cost improvements, favorable category mix and other factors.

This improvement in gross margin had a significant impact on the bottom line as operating margin improved from 4.8% to 6.4%. In other words, if the company can continue to significantly improve its gross margin, profits could skyrocket from here.

Like Costco, Target continues to open new stores and the company enjoys a number of competitive advantages, including its multi-category business model, store-based fulfillment of online orders and curbside pickup program.

Target is a stronger company than its recent performance suggests, and it looks like a good buy at a P/E ratio of 16. Analysts also expect similar earnings growth from Target and Costco next year, showing that Target looks like a bargain compared to the much more expensive Costco.