Wall Street is an emotional place, which is really what makes markets work. However, every so often, investors flow like lemmings in just one direction. That happens during bull markets and during bear markets.
Right now, the Nasdaq Composite (^IXIC -0.18%) has fallen more than 10% from a recent high, which is a correction. That often freaks investors out a little and can lead to a correction turning into a full-blown bear market (a drop of more than 20%). That’s when the babies get thrown out with the bathwater and smart investors can pick up bargains.
If you are a long-term investor, you should have your wish list ready, in case certain stocks fall further, and Costco (COST -0.42%) should be right on top.
Costco is an expensive stock
Before getting into Costco’s business, which is very attractive and very well run, it is important to look at the retailer’s valuation. Even after a recent price pullback (more on this below), the company’s price-to-sales, price-to-earnings, and price-to-book value ratios are all above their five-year averages. And, equally notable, they are all near the high end of their long-term historical ranges.
COST PE Ratio data by YCharts
Simply put, Costco’s stock looks very expensive today. Which helps explain why, as the chart below shows, it has fallen in lockstep with the Nasdaq during this correction. Effectively, the stock was a market darling. Investors bought into the retailer’s growth story in droves. But now that investors are turning cautious, they are selling in droves, probably looking to protect themselves from potential losses. This is pretty normal human behavior during a downturn, but it can open up opportunities if you think in decades and not days.
To be fair, Costco is still a long way from being cheap enough to buy for investors that care at all about valuation. But if this downturn continues, it might just end up back at reasonable, if not cheap, levels, which would make this growing retailer worth buying again for more growth-minded types.
What’s so special about Costco?
Costco is a club retailer, which means its customers pay a membership fee for the privilege of shopping in its stores. The revenues from membership fees don’t have many costs associated with them and, thus, fall almost entirely to gross income. Membership fees make up a little more than half of Costco’s gross income, which changes the entire retail game.
Essentially, Costco’s goal is to keep its customers happy, which it does by offering aggressively low pricing. It can do that because it has the benefit of membership fees to offset low retail margins. Given the over 90% membership renewal rate, Costco is doing a good job of keeping its customers happy. But more to the point, it is still executing very well right now.
In the fiscal second quarter of 2025 sales rose 9.1% with a similar jump in same-store sales (at stores open for more than a year). Notably, traffic increased 5.1% and the same-store average ticket was up by 3.2%. Wall Street’s consensus earnings estimate was a little above Costco’s quarterly tally, so investors were disappointed by the quarter. However it was still a very strong performance on the business front. And, over the long term, that’s what matters the most.
Make a plan now, or you may not take action later
Costco has a differentiated business model that has held up well over time; the company has increased its dividend annually for two decades and counting. Even after the recent pullback along with the Nasdaq Composite, the stock is expensive. But if this rout deepens, this one-time darling could be one of the babies that get tossed out with the bathwater.
If that happens, you’ll want to have it on your wish list and understand why you like the business so that you can make the contrarian move to buy while others are selling. You should probably start getting more interested in the stock if the average P/E drops back in line with the five-year average P/E, which is around 40 or so.
