Costco (COST) vs. Apple (AAPL)

 
Is This the Top for Costco Stock?
Costco (COST) vs. Apple (AAPL)
Should You Buy Costco Stock?

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Is This the Top for Costco Stock?

Costco (COST) is the largest warehouse retailer in the U.S. The company is well loved for its great deals on bulk packages of TP, rotisserie chickens and flat screen TVs.

Today, Costco’s stock is pretty well loved too: over the past six years, Costco stock has risen 152%, nearly twice as much as the S&P 500 index.

COST chart

Along the way, Costco has rewarded investors with regular dividend increases—every year for 12 years—as well as two hefty special dividends—a whopping $7 in 2012 and another $5 last February. Suffice it to say, Costco pays investors handsomely to own its stock. It’s not a high-yield stock—COST yields just a hair over 1% today—but it is one of the best dividend stocks in the market. 

The company has demonstrated consistent growth as well, growing revenues and earnings in each of the last five years.

So should you buy Costco stock today?

Costco (COST) Stock vs. Apple (AAPL) Stock

Before I answer that question, let me tell you a story. It’s about Apple (AAPL), possibly the most loved, most well known company in the world. Apple has consistently topped the Hulbert Financial Digest list of the most widely recommended stocks for years (Hulbert tracks the holdings and performance of over 100 investment advisories like ours). And yet, the stock hasn’t moved an inch since September 2012. 

That’s right—in September 2012, Apple hit a new all-time high just a little over $100 per share. And right now—three-and-a-half years later—APPL is still trading just a little over $100 per share ($101 as of this writing). Of course, in the meantime, AAPL fell as low as $60 (June 2013) and ran as high as $133 (last April). But when all is said and done, investors who bought three-and-a-half years ago and held on have made exactly one dollar (not including dividends).

What happened? Apple is still one of the most widely owned stocks in the market, the brand is still among consumers’ most admired, and iPhones still sell like hotcakes (and for about three or four times as much as competitors’ phones).

What happened back in 2012 is that Apple hit what we call “the point of peak perception.” The stock—up over 9,000% over the prior decade—was so widely owned and well loved that practically everyone who wanted to own it already did. Sales remained strong—the chart below shows that annual revenue has grown every year since 2012—and the stock even paid a dividend for the first time that year. Nevertheless, Apple’s greatest days were already behind it.

AAPL Revenue

There is one more clue to the story in the above chart though—while the blue revenue line continues to rise through and after 2012, its slope changes. That flattening you can see in the line between 2012 and 2013 reflects a deceleration in Apple’s sales growth. Sales were still growing—many companies would kill for sales growth like Apple’s—but they were growing more slowly. And for a widely owned, well-loved stock that’s risen over 9,000% in 10 years, any suggestion that the future is not quite as bright as the past is enough to send investors fleeing for the exits. Is that the case with Costco today?

Should You Buy Costco Stock?

It’s possible. Now, Costco stock hasn’t risen 9,000% in the past 10 years—it’s up 172%. And it’s not the most widely owned stock in the market. It’s a household name, popular enough with a certain type of investor, but it’s no Apple.

But take a look at the chart of Costco’s revenue below:

COST Revenue

Over the past year, Costco’s revenue growth has begun decelerating, just like Apple’s did in 2012. A year ago, sales were growing about 7% year-over-year, on average. Today, Costco’s comp sales are growing by closer to 4% (and that’s excluding the effect of lower gas prices and a stronger dollar, both of which are killing Costco’s year-over-year comparisons right now.)

This lower revenue growth caused Costco to miss analyst estimates for the second quarter in a row when it reported earnings last Wednesday.

So there’s a chance that even though Costco is still growing, and their rotisserie chickens remain well loved, we’ve already passed the point of peak perception for Costco stock.

Now, I’m not telling you to sell Costco stock here. We still own it in my Cabot Dividend Investor portfolio, and I still have it rated Hold. We sold half of our position earlier this year though, booking a profit of over 30%. And I’m watching the stock and those revenue growth numbers closely to see if this might be the end of the road for Costco—at least for a while.

If you’d like to follow along with my analysis, and find out what stock I think could be the next Costco, just click here to learn more about my Individualized Retirement Income System and my premium advisory, Cabot Dividend Investor.

Sincerely,

Chloe Lutts Jensen
Chief Analyst of Cabot Dividend Investor


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