Costco Stock Slides Despite Strong Fundamentals and Growth Plans
Costco Wholesale (COST) has seen a 10% drop in its stock price over the past six months, even as its sales and profitability continue to rise. The company's revenue, profit, and free cash flow have all increased, and its membership renewal rates remain above 90% in North America. Additionally, Costco plans to open 33 new warehouses in the next fiscal year. Despite these positive fundamentals, the stock has underperformed, declining while the S&P 500 has risen 17% in the same period.
The disconnect between Costco's performance and its stock price can be attributed to investor sentiment shifting away from defensive holdings like Costco and Walmart (WMT). These stocks were once seen as safe investments during economic downturns, but their premium valuations left little room for disappointing news. A drop in oil prices and Walmart's lower-than-expected profit forecast triggered a sell-off in the sector, from which neither stock has fully recovered.
Costco's latest quarterly report showed comparable sales growth and plans for warehouse expansion, indicating long-term confidence. However, the stock only gained 3% after the report, barely offsetting earlier losses. Investors scrutinized details like a one-time tariff refund driving part of the profit beat and a slowdown in membership-fee growth. Even after the decline, Costco's valuation remains elevated compared to its peers.
The premium reflects Costco's strong performance over the past decade, with a 624% total return, nearly double the S&P 500's 324%. The company's high membership renewal rate and recurring revenue base have historically justified its rich valuation. However, rising tariffs and fuel costs have made investors less tolerant of high valuations in the retail sector.
For long-term investors, Costco's fundamentals remain solid, with continued warehouse openings and strong cash generation. However, the stock is not yet a bargain, simply less expensive than at its record high. Investors seeking faster growth may continue to pull back, especially if the defensive premium continues to unwind.