Is Now a Good Time to Buy Costco Stock?
Costco stock is up 104% over the past five years. Will it continue to reward investors?
Short-term stock trading is fraught with difficulty due to the complexity of predicting short-term price fluctuations. Conversely, long-term investors who thoroughly evaluate a company's fundamentals and valuation often reap greater rewards. Costco Wholesale (COST -0.95%) has demonstrated the merits of this approach, as its stock price has more than doubled over the past five years, achieving a 104.2% increase as of Oct. 27—outpacing the S&P 500 index's 69% appreciation during the same period.
However, this historical performance is not a guarantee of future results. Will acquiring Costco's stock at the present moment still yield superior returns? Costco's operations continue to thrive, retaining existing members, enrolling new ones, and expanding its warehouse network. In the most recent fiscal year (ending Aug. 30), the company maintained a nearly 90% renewal rate, consistent with its long-standing average. Additionally, Costco added approximately 4% more paid members, reaching a total of 84.1 million.
Given Costco's continued success, the company expands its warehouse footprint and has ample space for additional growth. Typically, it adds between 20 to 30 new locations annually; in the last fiscal year, it added 25, bringing its total to 939. Management is cautious about expanding the business recklessly. Costco is expanding profitably, with operating income increasing 12.5% year-over-year to $11.7 billion.
The company's achievements have not gone unnoticed by investors, and the stock remains overvalued. At present, Costco's stock has a price-to-earnings (P/E) ratio of 48, surpassing its 10-year median of 38.
While it would be advantageous to purchase the shares at a lower valuation, it is preferable to invest in a profitable, growing company at a higher price rather than a lower-priced company with less favorable prospects. Consequently, I recommend acquiring Costco stock now and holding it for the long term to capitalize on its potential for future gains. For more informed investment decisions, consider The Motley Fool's premium services.
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