Retail powerhouses, Walmart (NYSE: WMT) and Costco Wholesale (NASDAQ: COST), have etched their names as one of the biggest companies globally. These titans have delivered exceptional returns to investors over the years, transforming a mere $10,000 investment into a fortune.
Yet, before rushing to add these stocks to your portfolio, it’s crucial to take a moment to assess the larger picture. Valued at hundreds of billions today, these retail giants demand a prudent entry point to ensure favorable returns for your investment.
So, the burning question is – are they worth the allocation of your hard-earned money at this juncture?
The Expansive Influence of Large Corporations
Walmart and Costco stand tall as colossal entities in the retail landscape. Nearly 90% of the population resides within a mere 10-mile radius of a Walmart store. While Costco may not have an identical retail footprint, its annual sales hovering around $250 billion reflect its robust presence.
Having weathered the tests of time, these entities have progressively amplified their scale as they peddle more merchandise. However, as sales escalate, achieving lofty growth becomes a Herculean task. This is reminiscent of the law of large numbers – a phenomenon where sustained growth becomes more arduous as the base figure increases. While not an iron rule, it’s a prevalent trend. As seen below, the annual revenue growth of both companies has dwindled as their sales reached astronomical levels.
WMT Revenue (Annual YoY Growth) data by YCharts
The days of 40% annual revenue expansion have faded into history, making way for modest single-digit growth. This deceleration warrants a cautious valuation approach, underscoring the importance of the price you pay. Overspending on shares could lead to a scenario where sluggish earnings growth lags behind, resulting in stagnation or downturn in stock prices.
Assessing the Current Valuations
Given this backdrop, it’s imperative to scrutinize the current market positions of these retail juggernauts. Walmart is trading at over 25 times its projected 2024 earnings, while Costco commands a hefty valuation of 46 times its earnings. Analysts foresee Walmart’s earnings expanding by an average of 6% to 7% annually over the next 3 to 5 years, whereas for Costco, the projected growth stands slightly above 9% annually.
WMT PE Ratio (Forward) data by YCharts
Delving into the PEG ratio, a metric contrasting earnings growth with stock valuation, sheds light on the steep prices of these stocks. Typically, I favor stocks with a PEG ratio under 2, ideally 1.5 or lower.
Presently, Walmart’s PEG ratio stands at 3.7, while Costco’s hovers at 5. This signals a substantial premium accorded by Wall Street to own a stake in these companies. Sustaining these valuations will prove challenging unless growth surpasses analysts’ predictions.
The Pitfalls of Overpaying
In the realm of investing, securing a quality asset at a slightly premium price is acceptable, provided you are willing to wait for the earnings to justify the valuation. Yet, when the premium balloons to the extent witnessed with Walmart and Costco presently, it spells impending danger. For instance, Costco could witness a daunting 50% dip and still be considered overvalued.
Although both Walmart and Costco epitomize excellence in the US retail sector, their stocks have sprinted too far ahead, surpassing the probable growth in the forthcoming years. Investors are advised to steer clear of these stocks until promising buying windows manifest.
Should you invest $1,000 in Walmart right now?
Ponder upon this before diving into Walmart’s stock:
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Justin Pope holds no positions in the mentioned stocks. The Motley Fool retains positions in and recommends Costco Wholesale and Walmart. The Motley Fool maintains a disclosure policy.
The expressed views and opinions are the author’s and do not necessarily align with those of Nasdaq, Inc.
