Is Costco's Stock Overdue for a Big Rally?

Costco Wholesale (NASDAQ:COST) recently posted its latest earnings numbers, reminding investors of just how strong and resilient its business is. Even though people often break their budgets shopping at the company's warehouses, the numbers suggest that consumers continue to find plenty of value there. Between buying goods in bulk and saving on gas, there's ample incentive for people to go to their local Costco warehouses.

The retail stock, however, hasn't been doing all that well this year, despite the underlying business producing strong results. Year to date, Costco's stock is up just 7%, while the S&P 500 has risen by 13%. Is Costco's stock overdue for a larger rally, and could one take place before the end of 2026?

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Costco's growth rate continues to be strong

Last week, Costco released its fourth-quarter numbers for fiscal year 2026, which were solid. For the period ending Aug. 30, the company's net sales rose by just over 11%, to $93.9 billion.

Its comparable growth rate, which is a more crucial figure for retail investors as it excludes the impact of new store openings and closures, came in at 9.4% for the entire company and 10.7% just for the U.S. operations. While changes in gasoline prices and foreign exchange bolstered its numbers, even when factoring those items out, the company's adjusted growth rate for the overall business was 6.7% last quarter.

All in all, Costco's business continues to do well. Achieving near 7% comparable growth is impressive given the state of the economy and consumers cutting back on discretionary expenditures due to rising prices. However, it's not just affluent shoppers who may be contributing to the strong growth, as buying in bulk, although expensive, can still be worthwhile for shoppers, as they can save on a per-item basis.

The biggest problem for Costco's stock is valuation

Costco's business is doing well, but that doesn't mean the stock is going to take off. It has roughly doubled in five years, and at over $400 billion in market cap, the stock isn't cheap. It's trading at around 45 times its trailing earnings, which is a steep multiple for any retail stock. Costco's growth was solid last quarter, but it's not high enough to justify that kind of premium for its stock.

It can make for a good, safe investment to hang on to for the long haul. However, Costco's stock, given its high valuation, isn't likely to go on a big rally anytime soon.

David Jagielski, CPA 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.