Everyone Said It Was Too Late to Buy This Stock. They Were Wrong.

For years, people have been saying that Costco Wholesale's (NASDAQ: COST) stock price run-up meant they'd missed the boat. Yet the shares have continued to do well.

Over the last decade, through July 17, the shares gained 459.6%, nearly double the S&P 500 index's 244.7% appreciation. That shows how investing in well-performing companies over long periods can result in outperforming the market.

Will this patience continue to pay off for investors?

Image source: Getty Images.

A look at the business

Costco's business seems simple. Yet it's been executing very well for a long time.

If you haven't been to a Costco warehouse, it fills huge spaces (147,000 square feet on average) with a variety of goods and services, often packaged in bulk sizes. While Costco has varied offerings, it focuses on a narrow number of high-quality products that it provides at low unit prices.

You have to pay an annual membership fee to enjoy the benefits, but people clearly feel the value outweighs the cost. Costco consistently has high retention rates and membership growth. Renewal rates were nearly 90% in the fiscal third quarter (ended May 10), consistent with previous quarters. And Costco ended the period with 82.9 million paid members, up from 82.1 million on Feb. 15.

It continues to attract crowds, with same-store sales (comps) increasing 6.6% for the quarter, after removing gasoline sales and foreign-currency translation effects. Fortunately, Costco doesn't merely produce sales growth. It continues to grow profitability, with operating income leaping 11.3% year over year to $2.8 billion.

What to do

The company's strong performance has fueled the stock price gain. That also means the shares trade at a more expensive valuation.

In the last 10 years, Costco's price-to-earnings (P/E) ratio has jumped from 37 to 47. The shares have a median P/E of 37 over this time. They also have a richer valuation than the S&P 500, which trades at a P/E multiple of 32.

That sounds discouraging, but it's important to remember that Costco has been growing sales and profits at a nice clip. Furthermore, the company still has expansion opportunities.

Management has been opening more than 20 warehouses annually for the last several years. It opened 16 locations during the first nine months of the fiscal year and plans to add another 13 in the final quarter.

While the stock's lofty valuation reflects the market's high growth expectation, Costco hasn't previously disappointed. Investors may see some short-term volatility, but for long-term investors, the shares remain an attractive opportunity.

Lawrence Rothman, CFA has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.