At the forefront of the artificial intelligence (AI) revolution, it's not just tech and internet stocks that are winning for shareholders. Even companies in old, boring industries can make excellent profits.
Look Costco (NASDAQ: COST). This magnificent retail stock has been crushing it for shareholders over the past three years, with a 98% increase, a return that includes dividends. Costco is undoubtedly a wonderful company, but you should avoid it like the plague.
This is why.
A bright red flag
Thanks to the stock's monumental performance, potential investors have one major reason to be hesitant to buy shares. And that is the steep valuation.
At the time of writing, Costco shares are trading at a price of price-earnings ratio (P/E) ratio of 46.8. This is 38% higher than the ten-year average. And it represents a 107% premium over the S&P500.
Otherwise, investors always want to prioritize paying an attractive valuation to buy shares in a company. It doesn't matter how great a company it is. If you acquire stocks when the market is selling them at a high price, returns are more likely to disappoint you. In other words, the investment is more likely to underperform.
I believe that is the case here. If you're willing to pay that multiple of the price-to-earnings ratio, you get a company that's expected to grow earnings per share at a compound annual rate of 10.8% between fiscal year 2023 and fiscal year 2026. I don't think that's worth it. price tag.
So many green flags
That one red flag is enough reason for investors to buy the stock right now. But to be clear, Costco is a fantastic company. That's why it should be on every investor's watchlist.
Costco has proven to be a very durable company that has stood the test of time. This longevity is a direct result of the company's economies of scale. Costco generated $238 billion in revenue in fiscal 2023 (ending September 3). This gives it unparalleled purchasing power with its suppliers, allowing the company to obtain favorable prices for goods. And these savings are continually passed on to shoppers through lower prices.
More and more shoppers are turning to Costco. As of February 18, the company had 73.4 million households, a figure that increased 7.8% year over year. Selling high quality items at low prices in huge warehouse clubs is a simple strategy that works.
Remarkably, Costco has continued to grow its sales and profits despite the continued threat of e-commerce. Even with a competitor like Amazon By offering fast and free shipping on millions of items, Costco's financial performance shows it is unfazed.
Over the past five years, net sales and operating income have increased by 65% and 71% respectively. The success of these two key metrics has, unsurprisingly, helped push the stock higher. Looking ahead, Costco will continue to experience growth thanks to increasing same-store sales, opening new warehouses around the world and implementing occasional membership fee increases.
This all points to a company that can rightly be described as great. But it's critical to remember that just because a company falls into this category doesn't mean you're staring at a valuable investment opportunity. I believe this is the current situation at Costco. By and large, investors are fully aware that this is a high-quality business.
Therefore, I think it is best for potential investors to wait for a more attractive entry valuation.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Amazon and Costco Wholesale. The Motley Fool has one disclosure policy.
1 Beautiful Stock That's Up 98% in Three Years: Here's Why You Should Avoid It Like the Plague Now was originally published by The Motley Fool
