One of the most important things trading education must incorporate is identifying overvalued stock. As you’ve guessed, an overvalued stock is a stock that’s priced more than it should be. Its price/earnings ratio and earnings outlook do not justify its high price, but investors have some emotional preference to the stock as a result of expectations regarding its future growth. Usually the overvalued stock slumps suddenly when reality strikes. A stock being overvalued is a risky situation, and such stocks must therefore be identified.
Why Costco Stock Could Reach the Overvalued Stage
Analysts believe there is a stock that could reach a stage where it is overvalued. Costco Wholesale Corp. ($COST) has had its shares decline by around 10% ever since Amazon ($AMZN) announced a $13.7 billion acquisition plan of the Whole Foods Market ($WFM) natural foods grocer. However, $COST shares gained close to 5.5% the previous week amidst expectations of significant growth in same-store sales. Further momentum could stabilize the shares, but analysts fear that it could eventually lead to the stock being overvalued. Costco shares have appeared to stabilize in the mid-$150s following the news of the Amazon and Whole Foods Market deal.
With Costco experiencing strong sales in July, this stabilization could be strengthened further, according to analysts. Costco’s same-store sales in July had a 6.2% growth, while estimates were only for 5.3%. Revenues too had an 8.8% rise to $9.4 billion. Despite all the popularity of Amazon’s online retail model, Costco is still managing to experience growth.
COST stock closed on Wednesday, August 2 at $161.28 per share. This relates to a gain of 1.9% over the latest 12-month period as well as a return year-to-date of 4.8%, while analysts’ estimate for a one-year target is $181.45.
Costco Can Hold Its Own against Amazon Onslaught
With the growing and pervading influence of Amazon and other online retailers, it is natural for investors to be skeptical about the capability of brick-and-mortar retailers such as Costco. However, the bullish investors believe that the company’s growth potential and membership-based business model make it a worthy buying option. The company itself has reiterated that it should not be compared with the business models of online retailers such as Amazon. Costco works differently and it wishes to focus on attracting more members to its warehouses through improved merchandise, efficient distribution logistics and better user experience inside stores.
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