The stock market is in turmoil due to tariffs this year, and one sector that's taking a big hit is retail. The SPDR S&P Retail ETF has declined by more than 14% since January, as investors worry about rising costs yet again for many retailers.
But one stock that has been able to avoid this sell-off thus far is Costco Wholesale (COST +1.10%) -- it's up more than 6% year to date (at the time of this writing). Can this be a safe stock to invest into right now, even if you're worried about more volatility and a potential bear market?
NASDAQ: COST
Key Data Points
Costco's business continues to show resiliency
What has made Costco a fantastic growth stock to invest in over the years is its continued dominance in retail. Consumers continue to flock to its stores in search of great value. And provided that you aren't looking to buy in modest quantities, you can often buy in bulk to save considerable money. The numbers don't lie, and Costco has been consistently generating positive growth for years, even as other retailers have struggled.
COST Operating Revenue (Quarterly YoY Growth) data by YCharts
Costco's strong ability to negotiate low prices with its vendors can also make it less vulnerable to the effects of tariffs. CEO Ron Vachris hopes to offer stability for the company's customers, stating on Costco's recent earnings call that, "Our goal will be to minimize the impact of related cost increases to our members."
If it can do that successfully, then this trend of positive growth may very well continue in upcoming quarters. But the growth rate may not be the biggest question mark around the stock these days. That may have to do with its growing valuation.
Is Costco's valuation too rich?
Costco's stock has risen by more than 200% in the past five years, which is more than double the S&P 500 index's returns of around 90% over the same time frame. That surging stock price means that investors who buy shares of Costco today are paying a hefty premium.
COST PE Ratio data by YCharts
At a price-to-earnings multiple of more than 56, Costco's stock is trading well above its five-year average of 43. The danger in paying such a high multiple for the stock is that leaves no margin of safety.
Even if prices don't increase, a recession could lead to consumers pulling back on purchases. Skipping a trip to Costco can sometimes be an easy way to save money by avoiding the temptation to purchase a lot more than you intended. If consumers do that and Costco's growth rate slows down, that could make this highly priced stock vulnerable to a sell-off because at such a high valuation, it's effectively priced for perfection.
Costco is an excellent business, but it's not a stock I'd invest in today
While Costco's business has a lot of growth potential and it's likely that the stock will become more valuable in the future, my concern is that a significant chunk of that future growth is already priced into its valuation. Returns for investors who buy the stock today could be minimal due to its steep price tag.
There are also many other growth stocks available to buy at more attractive valuations than Costco. While the business is sound and its fundamentals are solid, I don't think this is a safe haven stock to be holding, because in a bear market, it could be ripe for a steep decline.
