Article from InvestorPlace.com
5 Reasons Costco Stock is Overvalued
December 4, 2009
By Jamie Dlugosch, Contributing Editor, InvestorPlace
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There are a lot of stocks out there that are headed for a fall, and at the top of this list of overvalued companies is Costco (COST).
The popular wholesaler is making a habit of poor monthly sales results, and yet the stock does nothing but go up and up and up. I guess that’s what a cult following of true believers will do for your stock, so why fix problems when poor results are rewarded?
With stocks like Costco going up in the face of poor results, poor prospects and poor management, the bears are correct in suggesting that stocks like COST should go down in value instead of up.
It is a dangerous game, though, to be short stocks like COST no matter your convictions. Just because a stock is overvalued does not mean that shares cannot go higher. They can and often do.
But in this case, I would sell Costco! Here are five reasons why.
Reason #1 – Costco consistently disappoints in monthly sales
Costco has missed sales number for so many months, I’ve lost count. Most recently, the company said that sales for November increased by 6% helped by inflation in gasoline prices. Analysts expected growth of 8%. Excluding gas, the increase was a paltry 2% versus an estimate of 6%.
With such performance, it’s hard to explain why Costco stock was up so much during the same period other than to say thank God for the believers. These folks love Costco so much that they will put their head in the sand no matter the performance. The sheer volume of monthly disappointments is not an anomaly. It is a troubling trend that will likely continue. And only those wishing to lose money would invest in such a trend.
Reason #2 – Costco is losing the battle of the discounters
Wal-Mart (WMT), Big Lots (BIG) and BJ’s (BJ) are doing exactly what they should be doing in order to grow business during a recession, and as a result are performing quite well and beating the pants off Costco. And yet, only one of these stocks trades for more than 20 times earnings: Costco. Boy, I wish I could lose to my competition and still receive a premium valuation.
Big Lots (BIG) just reported a blow-out earnings quarter, and they are buying back stock feverishly due to its low valuation. I would bet heavily that Costco in its next earnings report struggles to meet expectations. I would sell this dog before the next earnings disappointment and focus on the competition instead.
Reason #3 – Costco has too much online competition
The holiday shopping season is here, and it is a key gauge of economic activity and a critical time for retailers. Although it is early, the data suggest that brick-and-mortar retailers are still struggling — what a beautiful excuse for Costco’s poor execution.
On the flip side, the online market is alive and well. Other than sundry items, Costco is competing with online players like Amazon (AMZN), Blue Nile (NILE) and Overstock.com (OSTK). Here, too, the company is losing to the competition. At a minimum, the growth prospects do not appear too bright for Costco. As such, does Costco really deserve a premium valuation? My answer is no!
Reason #4 – Costco is operating with a failed business model
Does it really make sense to charge people for a membership in order to obtain fabulous discounts? How about if those same discounts are available elsewhere? Talk about hubris.
What was a quaint little idea at formation is now inappropriate for cash-strapped consumers. That is, Costco is essentially asking customers to pay for access to their savings, but when customers can’t afford the membership fee, they end up shopping at Wal-Mart!
Until management realizes that its strategy is not working, sales results will continue to disappoint. And eventually the stock will succumb to the failure as well.
Reason #5 – Costco treats its customers like dirt
Adding insult to injury, Costco only accepts American Express. The credit card designed for the rich is the only card to be accepted at a discount retailer? The world is truly upside down.
I get the idea of wanting to expand your business, and I’m sure the deal is a sweet one for Costco, but it makes no sense. In most cases, the average, middle-class consumer stands to benefit the most from the discounts offered at Costco, but American Express is the credit card for the wealthy. To not accept other credit cards is an insult. No wonder growth has stagnated.
There is a ton of animosity regarding this policy. Is it really worth the anger to only accept American Express? Absolutely not, and the continuation of the policy says a lot about how Costco feels about the majority of the population. A company that doesn’t make the customer a priority should be avoided.
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On the other hand it is one of the stocks that Motley Fools recommends. I have no position - just put this on because it has some reasoning for an opinion on the stock.
Regards
Neil |
