Costco Wholesale (NASDAQ:COST) stock is the most expensive retail stock on the market, as the company has become one of America’s most dominant retailers.
Costco sells at 77 times earnings. With a market cap of $144 billion, it’s worth nearly all the 2019 sales of $152.7 billion. (Sales are expected to be at a rate of nearly $200 billion a year when it reports in August.)
Both that valuation and growth are unheard of for a retailer. Walmart (NYSE:WMT) is valued at less than two-thirds sales.
Costco lapped Walmart’s Sam’s Club warehouses by targeting the upper-middle class. News stories from reporters breathlessly discuss its apple pie rolls, high-end tequila, Mexican sodas , upscale raviolis and faux-fur body pillows. (Will there be cake? This is a real story.)
The Costco Battlefield
Costco is increasingly a battlefield stock. While sales accelerated sharply in June, some say the stock is waving the bear flag. But our Matt McCall says you should buy it with both hands (just don’t drop the cake).
Buying COST stock is controversial because the market has seldom been so expensive.
Costco bulls have been on a long winning streak. Costco is up 16% over the last year, 40% over the last two years, 125% over the last five. If you bought five years ago at $146, your capital gains have averaged 25% per year. If you bought $1,000 worth of COST stock at its 1985 IPO, your shares are now worth over $195,000.
This underlies McCall’s bull case. A new spike in novel coronavirus cases is a new reason to buy Costco stock. Our Bret Kenwell thinks Costco’s current momentum can take it to $350.
But other analysts see Costco as fragile, even slightly ahead of itself. They’re right. But that’s true of the whole market. Maybe it’s time to sell everything, buy a boat, and hope Fiji takes you in when you arrive.
Is Costco Controversial?
Costco is also an increasingly contentious political issue, at least on the local level. Locating new Costcos is a big issue at its Issaquah headquarters. Each store is a $100 million decision. Costco will open five stores by September, but it does close some. It looks for high-end demographics and needs big pieces of land.
The reaction can be mixed. It may be the last big box that can make a retail development go. Some towns are willing to forego taxes to land one. Others attract opposition from neighbors, sparking political controversy. Still others become the subject of dark conspiracy theories.
It’s proof of how embedded Costco is in the American consciousness. Costco has become an essential business during the pandemic, with special “senior hours” to protect people like me.
On the supply side, Costco’s power forces brands to make hard choices about cannibalizing their own sales. Do they label those tomatoes as Kirkland, or demand they be sold as Contadina? It makes a difference in price and certainty of sell-through.
The Bottom Line for COST Stock
The Costco track record indicates this is not a stock you buy or sell. This is a stock you own. You buy it whenever you see weakness. You accumulate it. Then you hold on to it.
This is a mistake I personally made. I bought Costco five years ago but sold it when I got nervous about the economic outlook. That’s not the way to play it.
If I were 30 again, I’d be looking to buy, and buy again. I’d buy fractional shares if I had to and reinvest the dividends. I’d wait until I was 65 before I even thought of selling.
Then I wake up. I am 65. I sell, I retire, and I dream of Fiji.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
