Costco Wholesale (COST) is an excellent corporation. It has an extraordinary Board of Directors that includes Berkshire Hathaway Vice Chairman Charlie Munger, has grown profits by 11% annually for a decade, has 195,000 workers that generally experience better working conditions than many of their similarly situated peers, and has an excellent balance sheet that features $200 million more cash on hand than total debt obligations required (which is extraordinary for a large retail corporation). As best I can tell, it meets every characteristic of Benjamin Graham’s “Defensive Investor” checklist.
Except one. Valuation.
It is no secret how well run Costco is, and the current $151 per share price tag reflects this information. It makes about $5.35 per share in profits. That’s a valuation of 28.2x earnings. Looking out over the medium term, this current valuation mixed with expected future returns is exactly the kind of thing that will give you … Read the rest of this article!