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Is Costco the Perfect Stock?

Dan Caplinger
November 5, 2010

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Costco Wholesale (Nasdaq: COST  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Costco.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 8.0% fail
  1-Year Revenue Growth > 12% 9.1% fail
Margins Gross Margin > 35% 12.8% fail
  Net Margin > 15% 1.7% fail
Balance Sheet Debt to Equity < 50% 21.6% pass
  Current Ratio > 1.3 1.16 fail 
Opportunities Return on Equity > 15% 12.5% fail
Valuation Normalized P/E < 20 22.66 fail
Dividends Current Yield > 2% 1.3% fail
  5-Year Dividend Growth > 10% 12.4% pass