Shares of Costco Wholesale (COST 0.40%) have climbed an impressive 135% in the past five years (as of Nov. 26). This huge gain puts it significantly ahead of the S&P 500 index. Investors are wondering if the good times will continue. Should you buy this retail stock before 2026?
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Valuation is a critical component of the investing process
Valuation can be a powerful tailwind for investors. However, this requires the starting valuation to be attractive, allowing room for multiple expansion. Costco doesn't fit the description. Its shares trade at a nosebleed price-to-earnings ratio of 50.
Looking out five years from now, there's a good chance that the multiple will contract. As time passes, Costco becomes more mature, which naturally starts to limit the growth opportunities available.
NASDAQ: COST
Key Data Points
Costco is a fantastic business
Any reasonable analysis of Costco should result in the same takeaway, which is that this is an outstanding business. Based on the valuation, the market would agree.
Costco has historically done a great job of growing its revenue base, an increase driven by more members and a solid renewal rate. Costco has also consistently been able to grow its same-store sales and earnings per share.
Great companies aren't always in a position to generate market-beating returns for investors. In the same way that Costco shoppers are always looking to take advantage of a good deal, investors should wait for the stock to trade at a cheaper valuation before considering buying.
