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Is Costco Cheap Enough To Buy After Record Earnings?

Back in September I told you to avoid buying new stock in Costco due to its high valuation…

Today, I give an update after it released its latest earnings and answer – Is Costco Cheap Enough To Buy After Record Earnings?

You can read the past article in full using the link above.

But if you don’t want to; here’s a quick recap before we get to today’s update.

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1 Reason To Avoid Costco

It’s Enormously Overvalued

Normally in these articles I talk about profitability, cash flow, the affects coronavirus is having on a company’s financials, among other things.

But frankly none of those matter with Costco Wholesale Corp (COST) due to its huge valuation.

Costco is a leading bulk food/warehouse club store in the world with 782 stores as of the end of 2019.

And due to people needing more stuff at cheaper prices lately its continued to perform well.

I expect it to continue doing so during and after this pandemic because of its solid competitive advantages, business model, and profitability.

And these things bring an enormous amount of stability to its stock as an investment as well.

This stability is leading many to buy Costco stock during this pandemic.

Which increases it stock price and makes it overvalued now.

Its current P/E is 41.2.

Its current P/CF is 22.1.

And its current forward P/E is 36.6.

I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…

Costco is well above this threshold.

Why below 20?

Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.

When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.

This means you have a better chance of earning higher returns owning its stock over time.  And these things combined make the stock a less risky investment.

With Costco being overvalued it means there is no margin of safety owning its stock… That you have a far lower likelihood of making money owning its stock over time.  And these make investing in its stock riskier.

None of this means I think Costco stock will implode over time.  I don’t.

I expect it to continue performing well during and after this pandemic as mentioned above.

But just because I expect it to continue performing well doesn’t remove the risk of its high valuation… Especially with the massive amount of uncertainty we’re dealing with today.

I don’t recommend you buy any stock based on what’s expected in the future… I recommend you buy based on how the company is performing now.

Not hopes.

And this high valuation means Costco is not a great stock to buy today.

For this reason of its huge valuation, I recommend you stay far away from investing in Costco stock.

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This thesis to avoid Costco due to its high valuation continued to play out after it released its most up to date quarterly earnings on December 10th, 2020.  Sort of.

  • Revenues rose 16.9% in the year-to-year quarterly period to a record $42.35 billion.
  • Operating income rose 34.9% in the year-to-year quarterly period to $1.43 billion.
  • And earnings per share rose 37.9% in the year-to-year quarterly period to $2.62 per share.

Even better news for Costco shareholders…

Since I told you to avoid its stock in late September 2020 its up 4.4% to $362.25 per share as of this writing.

This means we should have bought back in September, right?

No.

As I said back in September…

None of this means I think Costco stock will implode over time.  I don’t.

I expect it to continue performing well during and after this pandemic as mentioned above.

But just because I expect it to continue performing well doesn’t remove the risk of its high valuation… Especially with the massive amount of uncertainty we’re dealing with today.

I don’t recommend you buy any stock based on what’s expected in the future… I recommend you buy based on how the company is performing now.

Not hopes.

And this high valuation means Costco is not a great stock to buy today.

This remains true because as of this writing its still overvalued… 

Its P/E is now 37.5.

Its P/CF is 17.2.

And its forward P/E is 36.9.

I urge you to wait and remain patient enough to buy Costco stock… With market valuations at their 2nd highest levels in history you need to buy the safest, best, and most undervalued stocks.

Because when a crash happens overvalued stocks will fall more than undervalued ones… And this will make most of the overvalued ones cheap enough for us to buy.

When this happens, it gives you a larger margin of safety and means your returns will be higher going forward.

Until then, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.


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