Mad Money host and constant shouter Jim Cramer really seems to like Costco Wholesale (NASDAQ:COST). Now, I’m not saying that this is a reason to sell Costco stock, but it’s a cautionary signal if you’re in the “fade Cramer” camp. Plus, there are other issues with Costco that you need to be aware of.
Budget-conscious shoppers probably won’t like Costco’s recent fee hike, and budget-conscious investors won’t be very pleased with Costco’s valuation. Also, income-focused folks might not be too impressed with Costco’s dividend. So, Wall Street’s bargain hunters really ought to look elsewhere.
Cramer Congratulates Costco on a ‘Fantastic Job’
Always-yelling Cramer recently exclaimed, “Congratulations to Costco Wholesale Corporation … for not gouging, for doing great things. Fantastic job!” I wonder if Cramer got the memo that Costco just hiked its membership fees in the U.S. and Canada.
Specifically, Costco is raising the annual fee for its basic Gold Star membership from $60 to $65. That’s an 8.3% hike, versus the U.S. annual inflation rate (as measured by June’s Consumer Price Index year-over-year growth) of 3%.
Furthermore, it is increasing its annual Executive membership fee from $120 to $130. Surely, it’s not a mere coincidence that this also represents an 8.3% hike.
So, yeah, “Fantastic job.” Costco’s shoppers are often on a budget, and it shouldn’t be too surprising if some folks decide to shop elsewhere. Wall Street may praise Costco for raising its membership fees, but the company will succeed or fail on Main Street, where real people with real financial constraints live.
Costco’s Valuation and Dividend Concerns
Let’s say you’re not concerned about Costco’s fee hikes, and just want to get a great deal with Costco stock. Maybe you’re impressed with the company’s sales, which increased 6% year-over-year on an adjusted basis in the U.S. during fiscal 2024’s third quarter.
That’s a pretty good result, but does it justify Costco’s lofty valuation? Not necessarily. Alarmingly, Costco’s GAAP trailing 12-month price-to-earnings ratio is 52.04x. That’s more than double the sector median P/E ratio of 20.96x.
What about income-focused investors? You might not be highly impressed with Costco’s forward annual dividend yield of 0.5%. This is around half the consumer cyclical sector’s average dividend yield of approximately 1%. To me at least, it sure sounds like investing in Costco is a raw deal.
Costco Stock: Thank Cramer for the Sell Signal
I’m not advocating a full-on “fade Cramer” trading strategy. That said, it’s unsettling to see the Mad Money host gushing about Costco. After all, the 8.3% membership-fee hikes probably won’t sit too well with Costco’s customers.
And speaking of not sitting too well, investors might not like Costco’s high valuation and low dividend yield. Therefore, even if Cramer thinks the company is doing a “fantastic job,” it’s wise to sell Costco stock or just avoid it altogether.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.