You certainly don’t have to chase hot tech stocks to earn great returns in the market. As of May 20, an investor that bought $1,000 worth of shares in Costco Wholesale (NASDAQ: COST) five years ago would have $3,467, including dividends, for an annualized return of 28%. It completely left the S&P 500 index in the dust.
It’s highly unusual for a large retailer to deliver that sort of gain to investors. Let’s look at what caused the stock to perform so well, and what investors can expect over the next five years.
Why is the stock up?
Costco has delivered solid increases in sales and earnings. However, it’s clear the growth in the business can’t explain all the stock’s gains.
About half of the stock’s rise over the last five years came from an expansion in the price-to-earnings ratio (P/E), not growth from the underlying business. Costco’s trailing-12-month earnings nearly doubled over the last five years, but the P/E is also 87% higher as investors were willing to pay more for a share of earnings.
Will the stock keep soaring?
Costco is a fantastic business, but investors shouldn’t count on the stock to keep jumping 200% in value every five years.
Net sales climbed 7% last fiscal year, with net income increasing 8%. For what it’s worth, the average Wall Street analyst projects Costco’s earnings per share (net income divided by shares outstanding) to grow at an annualized rate of 9% over the next several years.
With the stock trading at a historically high P/E of 52, investors shouldn’t expect the stock to move any higher than the rate of earnings growth in the coming years.
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John Ballard 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.
If You’d Invested $1,000 in Costco Stock 5 Years Ago, Here’s How Much You’d Have Today was originally published by The Motley Fool