Is Now a Good Time to Buy Costco Stock?
Key Points
Costco's stock has outperformed the S&P 500 over the long term.
The membership-club retailer continues to execute well.
The company continues to add locations.
Short-term traders trying to make money by buying and selling stocks face immense challenges. That's because predicting short-term price movements can be difficult. Long-term investors who can analyze a company's fundamentals and valuation well tend to have more success.
Costco Wholesale (NASDAQ: COST) has rewarded this patience, with the share price more than doubling over the last five years, gaining 104.2% through Oct. 27. That handily beat the S&P 500 index's 69% comparable appreciation.
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But that's the past. Will buying Costco's stock right now result in a market-beating performance going forward?
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Costco's business continues to do well, retaining members, adding new paid ones, and opening new warehouses. In the latest fiscal year (ended Aug. 30), it had almost a 90% renewal rate, in line with its historical average. The company also grew paid members by about 4% to 84.1 million.
With Costco doing so well, it continues to open new warehouses, and it has room for further expansion. It typically adds 20 to 30 locations annually; it added 25 in the last fiscal year, bringing its total to 939.
Management isn't growing the company recklessly, either. Costco is growing the business profitably, with operating income increasing 12.5% year over year to $11.7 billion.
The company's success hasn't been lost on investors, and the stock isn't cheaply valued. At the moment, Costco's shares have a price-to-earnings (P/E) ratio of 48 compared to the 10-year median of 38.
It would certainly be nice if the shares were trading at a lower valuation before buying in. But it's better to pay a rich valuation for a profitably growing company than a lower one for a company with less-than-stellar prospects.
That's why I recommend purchasing Costco stock now and holding it for the long term, so you can benefit as well.
Lawrence Rothman, CFA has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.