One of the biggest mistakes I made in my investment life was to sell Costco Wholesale (NASDAQ:COST) stock. I sold at about $163. I was worried that its suburban flavor might not sit well with urban lifestyles. I was worried that smaller, millennial families would go elsewhere.
I should not have worried. COST stock has tripled since then. It was due to open Feb. 22 at about $510/share. Costco is selling for over 44 times trailing earnings.
The market capitalization of $227 billion supports estimated 2022 sales of $203 billion. Retailers just don’t sell for a premium to their sales. Not physical retailers, anyway.
Costco has become a safe-haven investment. It’s up 183% over the last five years. The dividend has risen by 60%, but the stock’s rise has the forward yield down to 0.62%.
When to Buy
There are good indications Costco stock could fall further. There’s Ukraine. High gas prices could yet tip us into recession. There are all those fears of urbanization and demographics that excused my sale.
There’s also Walmart (NYSE:WMT), whose Sam’s Club warehouse had a Super Bowl ad this month, followed by a short-term deal on memberships. Sam’s is growing. Membership income was up 9%, and sales 10%, in Walmart’s latest quarterly report.
I usually drive past a Sam’s on my way to Costco, but my sister is a member and likes it. The merchandise is more familiar, more middle-class, than what you find at Costco. The vibe is more casual.
Peak Costco
On the weekends Costco can be a madhouse. Twice in recent months I had to leave my nearest one for lack of parking. Costco plans 28 new stores this year, which can cost $100 million each to stock, and is pouring $4 billion more into its logistics. An opening can be a big deal. Hundreds of people recently lined up for hours before a new store opened in British Columbia.
Logistics may be why Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) vice chairman Charlie Munger recently predicted Costco will be a “titan” in online shopping. Personally I would love to avoid a trip to the store, but I’m not holding my breath.
There are also indications we may be hitting “peak Costco.” Sometimes they’re out of those rotisserie chickens. Their low gas prices now bring gas lines that remind me of the 1970s.
These problems are now in the hands of Ron Vachris, recently appointed president in line to succeed chairman Craig Jelinek. Vachris, 56, is a warehouse lifer. A story on his accession indicates he started working at The Price Club, which Costco bought in 1993, at the age of 16.
One of Vachris’ first decisions may be on raising the membership fee, which hasn’t risen since 2017. In past years Costco earnings closely tracked the membership fee number. Over the last few years it’s been beating that by about 30%.
The Bottom Line
In a world where the S&P 500 price to earnings ratio is 24.6, and the median stock has a PE of just 15, it’s hard to justify paying 44 times earnings for anything, let alone a retailer.
But when you look at the Costco stock chart, a price that peaked at $567 at the end of December, and you see investors rushing to “buy the dip” at $480, you realize again it’s the most loved retailer in the market.
It was once true that in times of global stress you were safe buying International Business Machines (NYSE:IBM), General Motors (NYSE:GM) or Intel (NASDAQ:INTC). Those days are over.
Today the safest haven seems to be Costco stock.
On the date of publication, Dana Blankenhorn held a long position in INTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.
