You certainly don’t have to chase the hottest tech stocks to make great returns in the market. As of May 20, an investor who bought $1,000 worth of stock redeemed Costco Wholesale (NASDAQ: COST) five years ago it would have been $3,467, including dividends, for an annualized return of 28%. It completely left the S&P500 index in the dust.
It’s highly unusual for a major retailer to be able to offer this kind of profit to investors. Let’s take a look at why the stock performed so well, and what investors can expect over the next five years.
Why is stock out?
Costco has achieved solid sales and profit growth. However, it’s clear that the company’s growth can’t explain all of the stock’s gains.
About half of the stock’s rise over the past five years has been due to an increase in its price-to-earnings (P/E) ratio, rather than growth in the underlying business. Costco’s trailing-twelve-month earnings have nearly doubled over the past five years, but its price-to-earnings is also 87% higher as investors were willing to pay more for a share of the profits.
Will the stock continue to rise?
Costco is a great company, but investors shouldn’t expect its stock to continue to rise in value by 200% every five years.
Net turnover increased by 7% last financial year, while net profit increased by 8%. For what it’s worth, the average Wall Street analyst expects Costco’s earnings per share (net profit divided by shares outstanding) to grow 9% annually over the next few years.
With the stock trading at an all-time high price-to-earnings ratio of 52, investors should not expect the stock to move higher than the earnings growth rate in the coming years.
Should You Invest $1,000 in Costco Wholesale Now?
Consider the following before buying shares in Costco Wholesale:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Costco Wholesale wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $652,342!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns May 13, 2024
John Ballard has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
If you invested $1,000 in Costco stock five years ago, here’s how much you’d have today. originally published by The Motley Fool
