Author: Bob Freedland
Covestor model: Buy and Hold Value
I received an interesting series of questions today from a reader of mine who wrote:
"Noticed that Costco is flirting with a new 52-week high and has delivered about 22% over the last year and 7% or so YTD. It's a hugely important stock to a lot of investors. Is it time to take some profits on Costco? If no, why not? How does the stock look from a valuation basis at this point? What new initiatives does management have underway that warrant watching? How does Costco stack up with its competitive set at this point? What does Costco's strong performance say about consumer sentiment?"
That is quite a few questions at once! But let's take a look at some of these and let's see if I can address them.
Let's first look at the stock chart. Here is the 'point & figure' chart from Stockcharts.com on Costco (COST):
One of the things that leads me to sell a stock is technical weakness which for me is a chart that looks like it is breaking its presumed upward trend. There is nothing in the Costco chart that I look at that appears to demonstrate anything except continued upward price momentum since bottoming at around $37 in March, 2009. As I write, (COST) is trading at $90.42 down $(0.87) or (0.95)% on the day. The stock appears to be trading well within its trading range on the chart above.
Costco was just recently added to my Covestor 'Buy & Hold' portfolio on March 7, 2012, at a price of $87.30, just a couple of points below its current price of $90.42. In general, I do not start 'taking profits' until I have a significant gain resulting in an oversized position within a portfolio. For me, a significant gain, which I do not have yet, is in the ballpark of a 30% price appreciation.
The reader asks about 'valuation'. According to Yahoo, Costco currently has a price-to-earnings (P/E) of 26.35, a price-earnings to growth (PEG) of 1.79, and a price-to-sales (P/S) ratio of 0.42. Over the past 5 years, Costco has carried a P/E ranging from 15.62 to 27.51 with an average P/E of 23.06. Thus at least historically, the P/E is a bit rich but not wildly overvalued.
In absolute terms, we can utilize the PEG ratio (called the "Fool Ratio" on Motley Fool) to determine if we are overpaying for a growth stock. This can also help us determine if we might wish to sell some of our Costco stock if it appears 'overvalued'.