Costco Stocks: Buy, Sell or Hold?

The shareholders were very satisfied Costcohis (COST 0.60%) records. The deposit club operator has posted a total return of 800% over the past decade (as of August 19), surpassing both S&P 500 and Nasdaq Composite Index by a wide margin.

This top retail stock continued to crush it for investors thanks to strong fundamentals. This is despite an uncertain economic context.

But with Costco trading near its all-time highs, should investors buy, sell or hold the stock?

The optimistic outlook

Costco’s impressive stock gains are directly attributable to its consistent revenue and earnings growth over several years. What’s remarkable is that it doesn’t really matter what kind of environment we’re in. It could be a global pandemic, supply chain issues, high or high inflation interest rates. Costco is still able to grow its sales and profit, which makes it a special retailer.

It reported same-store sales growth of 5.2% in July. Investors have come to expect steady gains with this key performance measure, which indicates the continued productivity gains of each location.

Besides the stellar financial performance, another reason to buy and own this stock is that people like the business’s easy deposits and low prices. With $57.4 billion in net sales in the third quarter of 2024, it is the third largest retailer in the world. Costco’s unmatched scale results in negotiating leverage with suppliers, which benefits customers.

Costco’s 10.8% gross margin is nothing to speak of. This is a unique operation only thanks to the membership program. Customers must pay annual fees, which they have proven pricing powerto shop at company warehouses. Customer loyalty and repeat visits, along with a high margin and predictable revenue stream, are the benefits Costco receives from running this business model.

Potential investors will also be inclined to buy, and existing shareholders will be encouraged to hold, as Costco’s stock has bucked the retail death knell. Even like Amazonwith its wildly popular Prime membership having achieved remarkable success over the past decade in the e-commerce niche, Costco continues to hum along, adding members and growing its revenue base. It has proven to be a sustainable business.

It’s time to sell

Costco is a wonderful company, a view that most quality-minded, long-term investors would certainly not dispute. The stockholders’ equity accumulation record speaks for itself.

But that doesn’t mean the stock is currently a smart buying opportunity. It is also essential to look at valuation so that investors can gauge the market’s outlook on a particular business.

The case for selling Costco stock is compelling. With Costco trading at just 2% of its peak price, investors are bullish. However, it’s worth pointing out that the stock also sells for a price-earnings ratio (P/E) ratio of 54. In its entire history as a public company, the stock has practically never been this expensive. I think the market is very excited about Costco.

Let’s assume that a decade from now, the P/E ratio will contract from 54 today to a 10-year average of 35. This forecast means that the current high valuation introduces a strong 35% headwind that is holding them back. of shareholder returns. Earnings would need to grow significantly faster, not only to offset the multiple decline, but also to produce a positive outcome for investors who could beat the market. Since this is a mature enterprise with less growth prospects than it had when it was smaller, I’m not sure the bottom line will accelerate anytime soon.

Shareholders should consider taking some profits off the table and redirecting that capital to opportunities that have higher return potential.