In fact, the OBV line is lower now than in December 2020 (marked with a green line), despite a 20% price gain. Does a super-high ADX necessitate a sell-off? No, but the weight of evidence continues to pile up against further Costco gains.Īnother technical issue to ponder is the weak performance of the On Balance Volume indicator during the 2020-21 advance. And, this instance was quickly followed by a sharp 20% price decline a few weeks later. The last time ADX moved well above 50 was in 2017. ADX is an indicator tracking consistency in price trend over the previous 14 days (roughly three weeks of trading). On the chart below I have circled in blue the ADX score of 58. In early August, the stock has reached its most overbought 14-day Average Directional Index reading in at least 30 years! Not only is the stock amazingly overvalued, but short-term investor enthusiasm has outlined an extreme in confidence, unlikely to be repeated anytime soon. So, here’s my main reason for writing about Costco today. If little yield is available and the share price declines, your leftover "purchasing power" will evaporate quickly when recalculated back into dollars, worth less and less. You are counting on steady equity price increases to make any sense out of holding the company now.
If your investment goal is to beat inflation, at a minimum, Costco shareholders may be getting in over their heads. 2.42% for an earnings yield and 0.68% for a cash distribution annually are well short of keeping up with hard asset inflation, represented by 5.4% CPI gains. The (-2.7%) inflation-adjusted operating income return is pictured below on a 25-year graph. More bad news, measured against CPI inflation, Costco’s earnings yield is actually a NEGATIVE number today, the greatest disconnect with the basic cost-of-living increases since the 1990s. Most Overvalued Short-Term Price In 25 Years This setup equates to a forward 1-year PEG of 6-8x! an expected deceleration in growth to between 6% and 8% next year (depending on the analyst). Conversely, Costco is selling at 45x normalized earnings (41x GAAP) vs. For example, if you can locate a blue-chip equity trading at a P/E of 15x trailing or current numbers, with an expected growth rate of 20% annually coming into focus, a true bargain is likely present. The classic definition of a screaming value buy is to find a stock selling for 1x PEG or less. Perhaps more worrisome is the fact earnings growth is projected to peak around 15% in the summer of 2021, with rates around 10% YoY estimated many years into the future.Īlready, Costco's forward 1-year price-to-earnings ratio divided by estimated growth has ballooned from the 2-3x range in 2019 to as high as 8x today. Below is a chart of the basic fundamental worth of shares on today’s exaggerated price. Using price to trailing earnings, sales, cash flow, and tangible book value (in combination), the August 2021 valuation is the most expensive ever, and DOUBLE the equivalent comparisons of a decade ago. Image Source: Company Website Extended Valuation Metrics My job is to evaluate the relative worth of an investment when measured against underlying operations. I don’t have any issue with its business model or customer base. I fully understand Costco has been growing 10%+ a year for decades.
So, to say owning Costco at $440 is a risky proposition in August 2021 may be an understatement of reality. When the bubble pops, how low can the price go? Believe it or not, a normalized growth-based valuation is dramatically lower, perhaps 50% under the current quote. The bad news is price and valuation have continued to balloon. I have mentioned Costco’s regular overvaluation characteristics in the past on Seeking Alpha. My question for investors is – when will the excessive price encourage serious selling to appear? It is entirely possible we are reaching for that point in the investment cycle, as I write this article. slowing business growth and spiking inflation rates. ( NASDAQ: COST) has continued to reach ever dizzying heights of overvaluation vs.
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