Right Now, Avoid Owning at All COST

First ... the good news. Costco is a great company. It is fiscally strong, earnings are predictable and the shares established a new all-time record high of $560.78 intraday on Dec. 10, following a fine quarterly report. In terms of overall business metrics, it doesn't get much better than the ratings shown below. Here are Costco's prior five and 10 year rates of change, plus projected growth rates out to 2024 - 2026. The key EPS growth held steady at 11% annualized over the previous decade. It is expected to maintain similar, but slightly lower, growth rates across the board in the near future. The old rule of thumb for investors was to limit purchases of stocks to those with price-to-earnings no higher than 1.5-times to 2.0-times their earnings growth rate. I'll give COST a nod toward the high end of that due to its outstanding track record. Even so, the theory would say to avoid the stock now as it commands about four-times its EPS growth rate right now. That suggests the shares are very, very pricey. Let's go to the historical data to see where COST might be expected to trade. Since 2011 the shares typically revolved around 27.3-times earnings. Nine of COST's last 10 best buying opportunities (green-starred below) allowed buyers to get long at P/E's ranging from 19.8-times, in 2012, to 27.7-times, as recently as March of 2021. The three previous times COST had investors worked up enough to pay 32.2-times to 44.9-times earnings (red-starred) each saw quick pullbacks. Costco fell 18.3% from November of 2015 through May of 2016. It backtracked by 28.3% from its September 2018 peak to its December 2018 nadir. It fell 21.9% from its November of 2020 high to its Covid-panic low in March of 2020. Those who waited it out probably wished they'd sold at those peaks to allow buying back much cheaper, not much later. COST's Dec. 10, 2021 record represented 44.9-times expected fiscal 2022 profits. COST has not been pricier than that in at least two decades. Costco's normal yield ran about 1.08% over the previous 10 years. At its current quote that number is a paltry 0.56%. That is 48% lower than average for COST shareholders. It's always hard to sell stocks that have just made you a ton of money. The news is all good, momentum is favorable and media coverage on the shares is glowing. Conditions like that, though, almost always occur when stocks are peaking. If you don't exit when the stock is at its all-time high valuation when would you? I'm not alone in my take on Costco. Yahoo Finance is quite generous toward the shares, yet still recognizes it as overvalued. Their year-ahead target price is $32.30 per share below where it sat when I took the screenshot below. You probably wouldn't hold an extra year to see that kind of decline. In reality, the pullback could be far worse. Yahoo's 12-month goal assumes COST will hold onto a greater than 42 multiple. History says that is unlikely to happen. Remember, traders could buy year after year at much lower P/Es. Those who overpaid in the past suffered sharp declines over the next three to six months. Independent research house Morningstar is more in line with my views and historical realities. It called COST a strong sell (1-star out of 5) even before Friday's huge surge. Morningstar sees the stock's present day fair value as just $391, almost $168 per share below it was on Dec. 10. If you won COST in a tax-sheltered account I'd recommend selling. If you're sitting on large taxable gains and don't want to pay taxes this year consider taking the following action to at least protect yourself against a near-term decline. Round lot quantities (any even multiple of 100-shares) held long qualify to support covered call sales. Writing in-the-money calls out to April or July of 2022 would provide reasonably good protection against reasonable setbacks while still offering a degree of further upside. The graphic below details the Dec. 10, 2021 closing quotes on three possible covered call choices. Upside potentials ranged from hitting $571.09 to $586.72 while offsetting from around 9% to 14.6% of downside risk. The call sales would also defer potential taxable gains into 2022, not reportable until you file your tax-year 2022 Schedule-D in April of 2023. If you still want to hold COST as expiration dates approach, you can always roll them up and out if the stock remains above the strike prices selected. That's my two cents on Costco. Bulls on the stock can do as they like and I wish them all good luck. If they simply sit tight, then watch the shares sell off they can't say they weren't warned.

Right Now, Avoid Owning at All COST

Costco is a great company, but owners of the stock won't like what I have to say about it ...

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