MW There are dot-com echoes beyond tech. This Costco shareholder explains why returns will be paltry at best.

By Steve Goldstein

Fund manager says Magnificent 7 stocks are cheaper than Costco

The countdown to the latest Nvidia earnings - and the fate of the broader stock market - is just over 24 hours away.

Ahead of whatever Jensen Huang & Co. announces, let's look at another highflying stock: Costco Wholesale $(COST)$.

Christopher Bloomstran, the president and chief investment officer St. Louis-based investment manager Semper Augustus Investments, is probably best known for his takes on Warren Buffett and Berkshire Hathaway $(BRK.B)$, and Bloomstran did devote 65 pages in his 168-page annual letter to the Nebraska conglomerate, his top holding. Bloomstran's view is that Berkshire Hathaway's gigantic cash position gives it a war chest "to take advantage of certain volatility and disruption" in the future.

Related: Warren Buffett's waiting for a 'wild swing' to the downside for stocks, says veteran Berkshire watcher

But it's Bloomstran's discussion of Costco that we'll focus on here. It's not often you have a fund manager explaining why his own investment is overvalued, as he also expressed regret at his periodic sales of the stock.

"The stock compounded at 19.7% annually over our 21 3/4-year holding period," he says. "That's turning each $1 million into $50 million. By comparison our stocks in aggregate earned 11.4% annually over 26 years, turning each $1 million into $16 million. Any Costco share sold in retrospect was a monumental error of commission," he says.

Granted, he didn't expect Costco's price-to-earnings multiple to grow from 18.7 to 56.9, for a company with what he calls a "lowly" 2.9% profit margin.

"Capitalizing a 2.9% margin at 56.9x equates to 165% of sales, very rich for a 2.9% margin. By contrast, the aggregate of the Mag 7 trades for 8.7 times sales. Oddly the Mag 7 at a 33.1x P/E is less expensive than Costco," he says.

Since square footage grows at about 2.5% per year, total sales growth ranging from 6% to 7.5% sounds reasonable, he says. Even assuming it makes another special dividend - the last one came in December 2023 - its dividend yield is 0.99%. And its margin improvement will likely be modest.

He put together three five-year scenarios - a bear case with 6% sales growth and 3% margins, a base case with 6.5% sales growth and 3.2% margins and a bull case with 7.5% sales growth and a 3.5% margin. In those scenarios, expected returns range from a 2.4% annual loss to earning 5.6% per year.

Other than hyperinflation, there isn't a scenario where Costco is deserving of a 56.9x multiple, he says. "In the short term all bets are off, but in the long term, Mr. Market will exact rationality on price," he said.

His broader message is that there are parallels between now and the 1998-to-2000 period, and not just in the megacap tech stocks, pointing to Eli Lilly $(LLY)$ and Walmart $(WMT)$ as other expensive large-cap stocks. "Atop the market are several very expensive companies, mostly large U.S.-based; and much of everything else, from mid- and small-capitalization shares to international and emerging markets are at much more reasonable levels," says Bloomstran.

The market

U.S. stock futures (ES00) (NQ00) weakened after the S&P 500 SPX finished at its lowest level since mid-January. Bitcoin (BTCUSD) traded below $90,000, and the yield on the 10-year Treasury declined.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5983.25    -2.15%  -0.48%  1.73%   18.02% 
   Nasdaq Composite                                                     19,286.92  -3.69%  -0.28%  -0.12%  20.72% 
   10-year Treasury                                                     4.347      -20.90  -19.10  -22.90  4.58 
   Gold                                                                 2955.6     2.14%   7.75%   11.98%  44.81% 
   Oil                                                                  70.8       0.33%   -3.15%  -1.49%  -8.76% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Home Depot $(HD)$ reported stronger-than-forecast fiscal fourth-quarter earnings. Super Micro Computer $(SMCI)$ faces a deadline to file updated financials.

Hims and Hers Health $(HIMS)$, whose stock plunged last week after Novo Nordisk said there was no longer a shortage of Ozempic, again faced shareholder wrath despite a sales outlook ahead of Wall Street expectations. Novo Nordisk $(NVO)$ shares jumped 4% in premarket trade.

Zoom Communications (ZM) late Monday narrowly missed Wall Street sales estimates.

The Case-Shiller home-price is due for release along with consumer confidence data.

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The chart

Every day the U.S. Treasury reports not just on the size of the debt, but also the revenue coming in. One internet user - @wabuffo - put together this table, on just the average withheld income and employment taxes from federal employment. The growth rate does tend to be erratic but at 3% year-over-year, there's no discernible deterioration from the highly publicized job cuts.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   PLTR    Palantir Technologies 
   SMCI    Super Micro Computer 
   GME     GameStop 
   TSM     Taiwan Semiconductor Manufacturing 
   BABA    Alibaba 
   AAPL    Apple 
   MSTR    Strategy 
   HOLO    MicroCloud Hologram 

Random reads

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-Steve Goldstein

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February 25, 2025 06:39 ET (11:39 GMT)

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