A good business does not automatically turn into a good investment.
It’s not just tech and internet stocks that are benefiting shareholders at the forefront of the artificial intelligence (AI) revolution. Even companies in old, boring industries can make impressive profits.
Please take a look costco (Fee 1.01%).this wonderful retail inventory It has been profitable for shareholders over the past three years, with returns including dividends soaring 98%. Costco is definitely a great company, but they should be avoided like the plague.
Here’s why:
bright red flag
Thanks to the stock’s incredible performance, there is one main reason prospective investors are hesitant to buy the stock. And that’s a harsh assessment.
As of this writing, Costco’s stock price is Price earnings ratio (PER) The ratio is 46.8. This is 38% higher than the average over the past 10 years. and it is, S&P500.
All else being equal, investors always want to prioritize paying an attractive valuation to buy a company’s stock. It doesn’t matter how great the company is. If you acquire stocks when the market sells them at large increases, future returns are likely to disappoint. In other words, the investment is more likely to underperform.
I think the same is true here. If you’re willing to pay that P/E, you’re getting a company whose earnings per share are expected to grow at an average annual rate of 10.8% from fiscal 2023 to fiscal 2026. I don’t think it’s worth a lot of money. price tag.
There are many green flags
That one red flag is enough for investors to hold off on buying the stock right now. But let me be clear: Costco is a great company. Therefore, it should be on every investor’s watch list.
Costco has proven to be a very durable business that stands the test of time. This longevity is a direct result of the company’s scale advantages. Costco’s merchandise sales for fiscal year 2023 (ending September 3) were $238 billion. This gives vendors unparalleled purchasing power and allows businesses to set favorable prices for their products. And these savings are continually passed on to shoppers through lower prices.
More and more shoppers are shopping at Costco. As of February 18, the company had 73.4 million member households, an increase of 7.8% year-on-year. The simple strategy of selling high-quality items at low prices in large warehouse clubs is effective.
Remarkably, Costco continues to grow sales and profits even in the face of the continued threat of e-commerce. Even if they are rivals, Amazon With fast and free shipping on millions of items, Costco’s financial performance shows it’s not budging.
Over the past five years, net sales and operating income have increased by 65% and 71%, respectively. Unsurprisingly, the success of these two key metrics contributed to the stock’s rise. Costco will continue to grow by increasing same-store sales, opening new warehouses around the world, and increasing membership fees from time to time.
These all point to businesses that can rightly be considered good. But just because a company falls into this category, it’s important to remember the following: It doesn’t mean you’re looking at a worthwhile investment opportunity. I think this is the current situation at Costco. Investors are well aware that, broadly speaking, this is a quality company.
As a result, I think it’s best for prospective investors to wait until there is a more attractive entry valuation.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Neil Patel has no position in any stocks mentioned. The Motley Fool has positions in and recommends Amazon and Costco Wholesale. The Motley Fool has a disclosure policy.
