Costco Wholesale Corporation (NASDAQ:COST) is up a modest 2% since the start of 2020. And while that would be unimpressive in a normal year, it looks amazing this year with the S&P 500 down 15% over the same timeframe.
There’s no shortage of YouTube videos of Costco shoppers loading up on supplies amid the coronavirus pandemic to explain why investors are likely a bit bullish on the stock today: the company could be headed for a strong quarter when it releases its next round of earnings results.
The one factor that’s working against the stock, however, is that it isn’t cheap. At a price-to-earnings multiple of 35, investors are paying a big price for the popular wholesaler. In its 2019 fiscal year, Costco’s sales were up by just 8%. But its bottom line grew by 17%. With a price-to-earnings-growth ratio (PEG) of more than four, the stock is an expensive buy given its level of growth. Typically, investors look for PEG ratios of one or less, and Costco is nowhere near that number today.
While it may be tempting to buy Costco’s stock because sales may get a boost due to the pandemic, that’s not a sustainable, long-term trend that investors should count on. And with the likelihood that there is a recession around the corner, consumer spending may be down in future quarters.
Unless Costco falls down to $250 or lower, investors are likely better off investing in stocks that are less dependent on consumer spending and that are more recession-proof than Costco.
Related Stories
