I love Costco Wholesale (NASDAQ:COST). But that doesn’t necessarily mean I should love COST stock.
I have been using warehouse clubs for 40 years. My late father loved them. When my daughter was a toddler, he celebrated by getting her a half-flat of strawberries and a pound of dark chocolate. It’s one of my fondest memories of him.
I regularly drive 10 miles out of my way to a Costco, bypassing a Walmart (NYSE:WMT) Sam’s Club. My credit card says Costco. It took me months to spend the cash reward they gave me right before the pandemic hit.
So the idea of selling Costco shares, especially with a $10 special dividend coming Dec. 11 to shareholders of record Dec. 2, will sound like heresy.
But rule No. 1 of investing is you don’t fall in love with your stocks.
Costco Is High
Costco has been a huge winner during the pandemic, as its most recent quarterly report shows. Sales for the summer quarter were up 14.1%, adjusted for gas prices and foreign exchange. Online sales increased 91.3% year-over-year.
Small wonder the shares are up 30% on the year, while the average S&P 500 stock is up just 11.7%. Even taken over five years the 134% gain in Costco has nearly doubled the 74% gain in the average stock.
But the shares are now more than fully valued. The market cap is $168 billion, higher than last year’s revenue of $166 billion. The price-earnings ratio is a startling 43, higher than Microsoft (NASDAQ:MSFT) or Apple (NASDAQ:AAPL). The regular dividend of 70 cents per share yields less than 1%. Add in the special dividend and the yield this year is 3.3%.
Part of Costco’s appeal is that the store runs at near break-even. Net income for the company during the last year was $4 billion. Memberships brought in $3.5 billion. When Costco next reports earnings on Dec. 10, analysts are expecting it to earn just $2 per share. They’re hoping for $2.25 but that still won’t come close to the last quarter’s $3.14.
It costs $100 million to open a new Costco warehouse, so Costco opens them judiciously. Its Web site lists five store openings through February, only two of them inside the U.S.
Analysts Love It
Costco is beloved by analysts. There are currently 22 following it on Tipranks, and 17 say buy. Their average price forecast, however, is just $5 ahead of its current price.
Then there’s the pandemic. It’s terrible now, but this too shall pass. I have no doubt Costco will continue to prosper, just not at its current rate.
The smartest man in the room remains Warren Buffett of Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B). We all know that. He sold out his 4.3 million Costco shares during the third quarter. He prefers Amazon (NASDAQ:AMZN). Over the last six months, Costco’s performance has only kept pace with the average S&P stock.
The Bottom Line on COST Stock
Like I said at the outset, Costco is a great company. If you’re looking out five to 10 years, you have a great investment.
But if you’re going to raise cash this Christmas, either to spend it or to reinvest it, you dump your winners and pick up the next wave. Costco is a $166 billion business and needs to be a $181 billion business during 2021 to keep up its current 9% growth rate.
There are some companies that, seeing strong growth, will go into overdrive to get more. They will overextend their supply chains and risk their customer relations. Costco isn’t like that. That’s why consumers, especially upper-income folks, love Costco. They depend on it, they trust it. It’s an asset management won’t put at risk for short-term profits.
When smart people sell for riskier investments, COST stock will come back to Earth. You can buy more then.
At the time of publication, Dana Blankenhorn had long positions in AAPL and MSFT and AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.