I bloody love Costco…
I say to my better half as I'm inhaling the Korean Fried Rice we buy every time we set foot in that big beautiful warehouse.
And I'm not shy about my affection for the place.
The £1.50 hot dogs...
The giant seasonal decorations that Ivy loves looking at...
The fact that I can make lunch-at-the-private-member's-club jokes every time I visit
And ultimately the novelty of items I simply can't find anywhere else.
But let me tell you... it aint cheap.
Especially for basic provisions that I can find elsewhere. It's more expensive than my local supermarket.
That's probably by design... lose money on the roast chickens and make it up on the sandwich platters.
But all this outpouring of love just to tell you that I won't be buying the stock.
Because just like a lot of items in the store... the stock is bloody expensive as well.
Even after a flat last 12 months... it still trades at 47x next year's earnings.
That's pricier than Nvidia, Google, Microsoft... and Walmart if you wanted a more apt comparison.
And even though I love the business... I can't justify paying 47x earnings for a company growing in the single digits.
(That's a PEG ratio of over 5)
Because even for this top quality compounder type companies, paying too much is a surefire way to ensure mediocre returns going forward.
If I get a chance to own it at 25x earnings, then yeah sure I'll back up the truck. But not 47.
And if you're a Costco shareholder this past year I'm sure it's been frustrating...
The same goes for shareholders of other high quality but relatively mature businesses like Intuit and McDonald's...
Watching those stocks stagnate while the Intel’s and Google's of the world are flying.
But valuation still matters... and 47x earnings for a mature company just ain't value no matter what way you slice it.
Sure you can always sell CSPs against it, but for a very low volatility stock like Costco the juice isn't worth the squeeze there either.
So while I'm sure I'll be spending money at Costco within the next few weeks, I won't be buying the stock
Oliver