Without knowing anything more about a company than that its forward-looking price-to-earnings (P/E) ratio stands at 33.0 in anticipation of 10% earnings growth next year, most people probably wouldn't be interested in buying the stock. Not many investors can say they haven't paid more for weaker earnings growth at some point in their lives. By and large, though, those are the kinds of numbers usually best left avoided by stock investors.

But what if those numbers describe a popular stock like Costco (COST -0.15%)?

And there's the rub. Investors have historically loved to love Costco at almost any valuation. But, after years of rising valuation levels that have accelerated higher since the coronavirus pandemic took hold, there's almost no room left for further upside. If anything, Costco is due for a pullback that would put its stock's price more in line with valuations of rivals like Walmart (WMT -0.10%), Target (TGT -1.55%), and Kroger (KR -0.55%).

Silver dice on a stock chart reading buy and sell

Image source: Getty Images.

Costco is oddly expensive right now

Costco's ability to grow has never been in question; the graphic below speaks volumes in that regard. The company's 2010 top line of $77.9 billion reached $166.8 billion for the fiscal year ending in August. Analysts are modeling revenue of $177.4 billion this year, and $190.9 billion next year. Per-share earnings growth has been even more impressive as the club-based retailer has expanded its scale. From an EPS of $2.92 a decade ago to a projected $9.56 EPS this year to $10.56 per share next fiscal year, the organization has nothing left to prove.

Chart showing a decade of Costco's steady sales and earnings growth.

Data source: Thomson Reuters Eikon. Chart by author.

The stock's price, however, has grown faster than sales and earnings have. In fact, it's arguably reached unsustainable valuations. It's just happened so gradually that nobody's taken enough notice to right-price Costco shares.

That's what the image below suggests anyway, plotting the stock's historical price-to-earnings ratio as well as its historical price-to-sales (P/S) ratio. The former now stands near 39, and the latter is at a record high of just under 1.0.

Chart showing rise in Costco shares valuation since 2009

Data source: Thomson Reuters Eikon. Chart by author.

On a sales basis, that's still cheap by marketwide standards, but not by consumer staples retailer standards. Both Walmart and Kroger are cheaper, and Target's P/S ratio is essentially tied with Costco's. Even then, all three other retailers are lower-cost options for investors based on earnings data, both past and projected.

  Trailing P/E Forward-Looking P/E Trailing P/S Forward-Looking P/S
Costco 38.8 35.3 0.96 0.87
Target  22.2 20.1 0.91 0.89
Kroger  11.6 11.5 0.21 0.20
Walmart  26.5 24.9 0.72 0.70

Data source: Thomson Reuters Eikon.

Party crash in progress

The typical justification of Costco's premium is the nature of its business. Membership fees not only help smooth out sales and earnings volatility, but membership itself often steers consumers past other stores toward Costco locales, where prices are generally lower. Margins are lower as well, but the company offsets this downside with volume. Costco's shoppers also tend to earn more money than rival retailers' customers, and generally spend more per trip too.

No advantage goes unchecked forever, though. Competitors are finally taking direct aim at Costco's hold on this segment of the market.

Yes, Amazon (AMZN -0.34%) is one of those competitors. It crept into the grocery arena years ago, first by offering dry goods online, but then adding perishables to the mix in certain markets. The 2017 acquisition of Whole Foods was a huge leap, but more recently, Amazon has started to open more conventional (read "less expensive") grocery stores.

Amazon still isn't Costco's biggest and most immediate threat, however. Walmart holds that title.

It's been a key rival for years but hasn't proven a problem for Costco yet. Just this month, though, Walmart unveiled membership-based Walmart+, which offers consumers lower-cost gasoline, in-store perks, and in some places, free same-day delivery of online orders. If consumers start to feel one shopping club membership is enough, or if Kroger's Kroger Plus loyalty card program is improved, Costco could be the one they end up dropping.

Bolstering this possibility is sheer inconvenience.

With only 552 U.S. Costco locations, the company's stores are not nearly as accessible as Walmart's 3,569 U.S. supercenters, Kroger's 2,758 stores, and even Walmart's 599 Sam's Club locales. Most U.S. Kroger and Walmart stores also now offer curbside pickup, as does Target, whereas Costco continues to eschew the idea.

Right stock, wrong time

Investors are not only overvaluing Costco relative to rivals (as well as its own history), but they are ignoring the fact that Costco's management isn't really addressing moves being made by rivals. Walmart+ doesn't offer much beyond free delivery on orders of at least $35 now, but that may not be the case in the near future. Kroger could readily make more of its loyalty program as well, and both rivals could easily play up their curbside pickup option into a serious value-added service. Target could even take such a swing.

Given how Costco is priced for significant growth -- and then some -- in a competitive environment that may not facilitate it, this isn't a time to take on new Costco positions. If anything, it may be a time to lock in some profits and walk away for a while.