Costco is a great stock.Here’s why you shouldn’t buy it now

Companies in the burgeoning field of artificial intelligence aren’t the only ones posting huge profits. Even if you’re a boring retailer. costco (Fee -1.04%), has increased significantly. The company’s stock price has more than tripled in the past five years alone. For comparison, S&P500 It increased by 86% during the same period.

This was definitely a great stock. This momentum will continue, with a double-digit increase already in 2024 (as of March 21). And it was a longtime favorite of the late Charlie Munger.

However, you shouldn’t buy Costco stock right now. There’s a very obvious reason for that.

Don’t ignore important factors in investing

The era of ultra-low interest rates and low debt in the 2010s led to soaring stock prices that were disconnected from the fundamentals of business. In this environment, investors seemed to care less about valuations and instead prioritized growth and business quality above all else. That’s not necessarily a bad thing, but it ignores the fact that valuation is still a key factor in successful investing.

This is why Costco’s monster stock returns in recent years are a reason not to buy the stock.As of this writing, the stock is trading at nosebleed levels. price vs. revenue (PER) ratio is just under 49 times. With the exception of earlier this month, stocks have never been this expensive this century. This shows that optimism surrounding Costco is currently at a high level.

And that’s exactly why it’s not wise to buy stocks. Yes, Costco reports strong fundamentals. However, the company’s P/E ratio has also increased by 60% over the past five years. The market continues to drive up stock prices even as business growth opportunities become more limited over time. No one disputes the fact that Costco has far less expansion potential today than it did a decade ago. However, the PER at that time was 25 times.

When expectations are this high, there’s nothing left safety range For future shareholders. Therefore, the downside risk is much greater than the upside risk.

Investors should wait for a major pullback before buying. But what kind of evaluation is appropriate? Opinions vary from person to person, but I will not invest unless the P/E ratio returns to the mid-20s.

high quality company

One of the reasons Costco’s stock price is doing well is because of its strong performance. Net sales increased 60% from fiscal 2019 to fiscal 2023, a period marked by disruptions such as the outbreak of the coronavirus pandemic, inflationary pressures, and a rapid rise in interest rates. Although there are still concerns about a recession these days, Costco was able to increase same-store sales by 5.6% in its most recent quarter (Q2 2024, ending February 18). It’s clear that this is a stable, consistent business that deserves a premium from investors.

During the aforementioned four-year period, Costco Diluted earnings per share Increases at a faster clip. Although operating margins may seem low, the fact that revenue is growing faster than revenue shows that Costco can scale.

Costco’s massive scale is precisely what gives it its most important competitive advantage. As the world’s third largest retailer, the company has unparalleled purchasing power and bargaining power with suppliers. These lower per unit costs are then passed on to shoppers in the form of lower prices.

However, not everyone can shop at Costco warehouses. The business operates a successful membership model with an excellent renewal rate of 92.9% in the US and Canada. This also increases loyalty.

Long-term success in retail is the exception. Costco has established itself as a dominant force in the industry. However, you shouldn’t buy the stock right now, as the market has more than fully valued this.