Costco: Patient Investors Know the Bear Case (NASDAQ: COST)

Costco (NASDAQ: COST) has trounced the S&P 500 index in recent times. The warehouse club operator's shares produced total returns of 125% and 564%, respectively, in the past five and 10 years (as of Aug. 13). Fantastic gains don't always have to come from the technology sector.

With an outstanding performance like that, it can be challenging for investors not to be overly optimistic about the retail stock's prospects. This is especially true as the business continues to operate from a position of fundamental strength.

But the most patient investors have taken the time to understand Costco's bear case. This will certainly provide a more thorough understanding of this opportunity.

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Costco isn't on the discount rack

The biggest bear-case argument when it comes to Costco focuses solely on the valuation. Unlike the products the company's hundreds of warehouses sell, which are offered at the lowest prices around, this stock is not on the discount rack. In fact, it has traded at a seemingly expensive valuation for quite some time.

Right now, shares can be bought at a price-to-earnings (P/E) ratio of about 48.4, leaving no margin of safety for prospective investors. For comparison's sake, the S&P 500 index currently trades at a P/E multiple of 26. So, the market is offering Costco at an 86% premium to the popular benchmark.

In mid-August 2021, shares traded at a P/E ratio of 42.1. Any rational investor would have viewed this as being a very expensive entry point. As mentioned, however, the stock had an impressive performance in the past five years. Based on the market-beating total return, the bulls might argue that the stock was actually cheap back then.

The persistently elevated valuation means that the investment community probably prizes Costco based on its predictability, durability, and recession-proof nature. It could be viewed as a safe stock. Nonetheless, it's extremely difficult to argue that adding the company to your portfolio today is a wise move

It's impossible to know if and/or when market sentiment will ever shift, resulting in a more downbeat view of this business. I think there's a high likelihood that investors will eventually ascribe Costco shares a valuation that accurately reflects its financial numbers, which can be measured, and not its ability to add peace of mind to a portfolio, a non-quantifiable trait.

Add this high-quality compounder to your watch list

So, what's the best course of action that investors can take? I believe Costco deserves a spot on the watch list for now. Your patience will be tested with this one, but it might end up being worth it.

There's no denying that this is a high-quality company. One of the most obvious reasons why comes down to Costco's wide economic moat, which is bolstered by a powerful scale advantage.

In fiscal 2025 (ended Aug. 31, 2025), the business reported $269.9 billion in net sales, making it the world's third largest retailer. But Costco differentiates itself by selling 4,000 stock-keeping units at its warehouses, significantly less than the 30,000 at rival supermarkets. Consequently, the company has tremendous negotiating leverage over its suppliers, resulting in favorable costs that are constantly passed to shoppers.

What's more, Costco's business model relies on memberships, which drive recurring and high-margin revenue, as well as repeat visits. As of May 10, there were 82.9 million membership households that brought in $1.4 billion in fee income during the latest fiscal quarter (Q3 2026). The renewal rate in the U.S. and Canada held steady at 92.2%.

The company's financial performance speaks for itself, as the consistency is noteworthy. Investors will struggle to find the last fiscal year that Costco posted a same-store sales decline. Demand has proven to be sustainable through various macroeconomic conditions.

These positive attributes warrant further study on the part of interested investors. If the P/E ratio contracts to 35 or below, Costco will look like a very compelling buy.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.