Costco looks priced for perfection.
Costco Wholesale (COST -0.77%) has been one of the biggest winners in the retail sector over its history. Its simple business model of selling bulk goods at bargain prices while collecting lucrative membership fees has generated a wide economic moat and driven steady growth.
However, one analyst is calling time on the latest Costco rally, effectively forecasting a decline in the stock.
Image source: Costco.
Truist downgrades Costco
Costco shares keep churning higher, but those gains have come predominantly from multiple expansion rather than earnings growth.
Truist credited the business for having probably the highest barriers to entry in retail. However, the firm also noted potential headwinds from scanning IDs as Costco cracks down on card-sharing, as well as from a change to its chicken packaging.
The firm essentially argued that the stock is priced to perfection and that positive catalysts like its special dividend and membership fee increase are behind. It downgraded Costco’s stock from buy to hold and maintained a price target of $873, implying a downside potential of 3%.
Is Costco a sell?
It would be hard to justify selling a stock like Costco as the business continues to look well-positioned, but its rich valuation should inspire some caution.
At a price-to-earnings ratio of 57, Costco trades at a valuation more in line with high-growth tech stocks than a reliable retailer.
Given the strength of the business model, selling the stock seems unwarranted, but Truist is right. Investors are better off waiting for a pullback in the valuation than chasing at the current price.
Costco can maybe do no wrong in the eyes of investors, but it won’t take much of a misstep to send the stock lower from this lofty valuation.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
