Costco's Stock Is Near All-Time Highs, but There Could Be Trouble Ahead

Costco Wholesale (NASDAQ: COST) has routinely been a top retail stock to own. It's coming off a stellar performance in 2024, when its shares rallied nearly 39%. And there's good reason for that, as the company has continued to post strong, resilient growth numbers even as other retailers struggled due to rising costs.

But the problem is that with the stock rising rapidly and now trading at an inflated valuation, near its all-time high, it could be ripe for a decline. And there could be a major headwind looming, which could provide investors with a reason to consider selling the stock sooner rather than later.

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Costco Teamsters union authorizes a strike

Last week, the Costco Teamsters, a union of 18,000 employees, voted in favor of a strike if a new contract is not reached before the current one expires on Jan. 31. That represents a little more than 8% of the workers Costco employs in the U.S., and it could affect more than 50 stores across the country.

There are a couple of possible ramifications from this.

The first is the obvious impact this may have on day-to-day operations. While 8% of its workforce may not sound significant, Costco's warehouses are busy, and even a modest decline in workers could adversely impact the experience for shoppers and affect sales.

There's also the potential damage this may do the company's image; Costco is often seen as a business that takes care of its workers and offers competitive wages and benefits. A prolonged strike with a significant chunk of its U.S. workforce could undermine that perception, and perhaps sour some investors on the business along the way.

A high-priced valuation means investors aren't expecting any hiccups

Costco's stock, given its high valuation, also makes it vulnerable to sell-off should there be any issues. The stock is trading at a whopping 56 times its trailing earnings and is effectively priced to perfection. Even without the possible headwind of a labor disruption affecting the business in the near term, I'd argue it's overpriced, given its modest single-digit growth rate.

COST PE Ratio data by YCharts

Retail investors clearly love Costco's brand and are willing to pay a high multiple for it. But this is still a company that generated just 7.5% revenue growth in its most recent quarter (period ending Nov. 24, 2024).

It's a good business and there's a lot more growth ahead for Costco in the future, but investors are paying an obscene multiple for it right now. Not only can that mean limited returns in the near term, but it can also make the stock vulnerable to a sell-off. If this labor unrest lasts for a long stretch, it could dampen.

Costco's stock is overpriced, and a decline could be overdue

I'm not overly concerned with Costco's labor issues, as these are issues all retailers have to deal with at some point, whether they are seen as good companies or not. And this is not something that should adversely weigh on the business over the long term.

What's more problematic is the stock's valuation. Although Costco is a good business to invest in for the long haul, that doesn't mean that the stock is worth buying at any price. Investors should consider the opportunity cost of missing out on an investment because money is tied up in a less-than-optimal one. At such a massive multiple, a lot of growth is already priced into Costco's stock, which can result in modest returns for investors in the future.

While Costco may be a great business, the stock is simply too expensive for it to be worth buying right now, and a correction could be around the corner, regardless of how the current labor issues play out. There are many other, more attractively priced growth stocks out there that investors can add to their portfolios.

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David Jagielski 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.