The S&P 500 has been on a phenomenal run. After soaring 24% in 2023, it climbed 23% last year. Today, the benchmark index trades in record territory.
Naturally, investors are probably wondering if there are any deals in today's market as many of the best businesses in the world trade at expensive valuations. That's why it's a good idea to be patient and wait for the right opportunity.
There's one high-quality company that I've been following for some time. The stock, which I believe is overvalued, has soared 238% in the past five years. I can't wait to buy it at a discount.
Trading at a premium
Most investors are familiar with Costco (COST 3.25%). The discount warehouse chain has made for a fantastic investment, crushing the overall market.
However, the valuation has gotten stretched. As of this writing on Feb. 4, shares trade at a price-to-earnings ratio (P/E) of 59.9. In its entire public history -- a time period that spans four decades -- Costco stock has never been more expensive.
Astute readers will argue that shares have always sold for a steep valuation. On the one hand, there's validity to this point. Five years ago, the stock traded at a P/E of 35.8, which undoubtedly wasn't cheap. But since then, this has been a major market outperformer.
On the other hand, even in that context, it's difficult for someone to say it makes sense to pay 60 times earnings for Costco. Wall Street analyst consensus estimates call for earnings per share to rise at an annualized pace of 11.6% over the next three years. The profit trajectory doesn't justify the nosebleed valuation.
NASDAQ: COST
Key Data Points
Costco is a great business
Nonetheless, this is a tremendous company, which is why it's on my watch list. I may not be a buyer now but certainly appreciate the company's success.
Costco possesses a wide economic moat, thanks largely to its scale advantage. It generated $61 billion in net sales during Q1 2025 (ended Nov. 24). That's a massive sum that makes this the world's third biggest retailer.
However, because the typical Costco warehouse only carries 4,000 stock-keeping units, a fraction of what rival supermarkets have, the business is able to buy huge quantities of goods. This gives it unmatched negotiating leverage over its suppliers. These cost savings are always passed to consumers in the form of low prices.
Meanwhile, shoppers are encouraged to make repeat visits. That's because they have to pay annual fees to be members and have the right to visit a Costco location. Those membership fees generate a significant share of Costo's bottom-line profits, too.
This behavior is demonstrated by steadily increasing same-store sales. Even over the past few years, with a pandemic, inflationary pressures, and higher interest rates, Costco was able to consistently grow this metric.
This supports the company's healthy profitability. In the past decade, between fiscal 2014 and fiscal 2024, the business saw its net income grow 258%. Strong bottom-line performance allows management to pay sizable special one-time dividends, in addition to the regular payout.
Waiting for a discount
I'd love to own Costco one day. But with the company's P/E ratio at nearly 60, I'm avoiding the stock as there's no margin of safety being presented to prospective buyers today. In other words, there's notable downside should the business show even the slightest miss when reporting financial results.
If the P/E ever gets closer to 30, I'd be an aggressive buyer. I'm not sure what events would need to conspire to drive stock prices lower, earnings sharply higher, or some combination of the two. However, I'll continue to patiently follow Costco for such an opportunity. Given the stock's impressive performance, the valuation may never drop to a level at which I feel comfortable buying.
