Costco Stock: Buy, Sell, or Hold?

Shareholders have been very happy with Costco 's (NASDAQ: COST) track record. The warehouse club operator has put up a total return of 800% in the past decade (as of Aug. 19), trouncing both the S&P 500 and Nasdaq Composite Index by a wide margin.

This top retail stock has continued to crush it for investors, thanks to strong fundamentals. This is despite an uncertain economic backdrop.

But as Costco trades near its all-time highs, should investors buy, sell, or hold shares?

The bullish perspective

Costco's impressive stock gains are directly attributed to its consistent revenue and earnings growth over many years. What's remarkable is that it doesn't really matter what type of environment we are in. There could be a global pandemic, supply chain issues, high inflation, or high interest rates . Costco is still able to increase its sales and profit, which makes it a special retailer.

It reported a same-store sales gain of 5.2% in July. Investors have come to expect steady gains with this key performance metric, which indicates the ongoing productivity increases of each location.

Besides stellar financial performance, another reason to buy and hold this stock is because people love the business' no-frills warehouses and low prices. With $57.4 billion in third-quarter 2024 net sales, this is the world's third-biggest retailer. Costco's unmatched scale results in negotiating leverage with vendors, which benefits customers.

Costco's 10.8% gross margin is nothing to write home about. This is a unique operation solely because of the membership program. Customers must pay annual fees, which have proven pricing power , to shop at the company's warehouses. Customer loyalty and repeat visits, coupled with a high-margin and predictable revenue stream, are the benefits Costco receives from running this business model.

Prospective investors will also be inclined to buy, and existing shareholders will be encouraged to hold, because Costco shares have bucked the trend of the death of brick-and-mortar retail. Even as Amazon , with its wildly popular Prime membership, has found remarkable success in the past decade in the e-commerce niche, Costco just keeps humming along, adding members and growing its revenue base. It has proven to be a durable business.

Time to sell

Costco is a wonderful company, a viewpoint that most long-term and quality-focused investors would certainly not argue with. The track record of compounding shareholder capital speaks for itself.

But that doesn't mean the stock currently makes for a smart buying opportunity. It's critical to also look at the valuation, so investors can assess the market's perspective of a particular business.

The case to sell Costco stock is compelling. Given that Costco trades just 2% off its peak price, investors are bullish. However, it's worth pointing out that the stock also sells at a price-to-earnings (P/E) ratio of 54. In its entire history as a public company, shares have virtually never been this expensive. I believe the market is very enthusiastic about Costco.

Let's assume that a decade from now, the P/E ratio will contract from the 54 it is today to its trailing 10-year average of 35. This forecast means that the current high valuation introduces a powerful 35% headwind that gets in the way of shareholder returns. Earnings would need to grow significantly faster to not only offset the multiple decline, but to produce a positive result for investors that could beat the market. Since this is a mature enterprise with fewer growth prospects than it had when it was smaller, I'm not confident the bottom line is going to accelerate anytime soon.

Shareholders should consider taking some profits off the table and redirecting that capital to opportunities that have potential for higher returns.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Costco Wholesale. The Motley Fool has a disclosure policy .