You don’t necessarily have to chase popular tech stocks to make big gains in the market. Investors who bought $1,000 worth of tech stocks as of May 20th would have made Costco Wholesale (NASDAQ: COST) Five years ago, it was worth $3,467 including dividends, a 28% annualized return. S&P 500 Index in the dust.
It’s highly unusual for a major retailer to deliver such returns to investors, so let’s take a look at why this stock has performed so well and what investors can expect over the next five years.
Why are stock prices rising?
Costco has delivered solid sales and profit growth, but it’s clear that business growth alone can’t explain all of the stock price gains.
About half of the stock’s rise over the past five years has come from an expanding price-to-earnings (P/E) ratio, not from underlying business growth. Costco’s trailing-12-month earnings have nearly doubled over the past five years, but its P/E has also risen 87% as investors have been willing to pay more per share of earnings.
Will stock prices continue to rise?
Costco is a great business, but investors shouldn’t expect the stock to keep rising 200% every five years.
Net sales increased 7% and net income increased 8% last fiscal year. For reference, Wall Street analysts on average expect Costco’s earnings per share (net income divided by shares outstanding) to grow at a 9% annual rate over the next few years.
With the stock trading at a historically high P/E of 52, investors shouldn’t expect the stock to grow faster than earnings over the next few years.
Should I invest $1,000 in Costco Wholesale right now?
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John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
If You Invested $1,000 In Costco Stock Five Years Ago, Here’s How Much You’d Have Today was originally published by The Motley Fool.
