Investors tend to flock to safe stocks during periods of uncertainty, looking for established companies peddling products and services that remain consistent during good times and bad.
Costco (NASDAQ:COST) stock has climbed 10% year-to-date, outperforming the S&P 500, which is down 3% over the same period, providing at least some anecdotal evidence for this trend.
But it’s not all smooth sailing for the retail giant. The company’s international supply chains will surely be impacted by the ongoing tariff tit-for-tat lurking on the horizon, which could suppress margins going forward.
Costco CEO Ron Vachris seemed to acknowledge this fact on the company’s most recent earnings call in early March, remarking that “we are prepared, our people are very well equipped to lower prices and defer any cost increase that come our way” due to tariff increases.
Investor Thomas Riba is not too worried about the company, noting that moves to absorb tariff increases would surely instill customer loyalty and lead to improved market share for Costco. However, this does not bode well for COST’s share price.
“Costco’s robust business model is prepared to navigate the tariff environment, but the stock might deliver poor returns going forward,” foresees the 5-star investor.
Ribas’ concerns extend beyond the tariff worries. The investor points out that Costo recently unveiled a new employee agreement that will increase wages by 3%. Again, though this might be good for the long-term health of the company, Ribas mentions that it could also cause the share price to suffer.
“While I view this policy of taking care of employees as highly positive and improves Costco’s reputation, it will create a 13bp headwind in SG&A costs,” adds Ribas.
Therefore, despite the company’s strong position and healthy prospects, the investor notes that there will be plenty of pressure on COST. Moreover, according to Ribas’ calculations, COST is trading at a decent premium above its fair value.
Putting it all together, Ribas thinks that investors should hold their horses for the time being.
“The expected rate of return is not that great, and if the valuation normalizes, investors should expect low single-digit returns over the next few years,” concludes Ribas, who rates COST shares a Hold (i.e. Neutral). (To watch Ribas’ track record, click here)
Wall Street is more upbeat about Costco stock. With 20 Buy and 7 Hold recommendations, COST holds a Moderate Buy consensus rating. Its 12-month average price target of $1,086 and change suggests an upside of 7.5%. (See COST stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured investor. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.