Imagine that you wanted to buy a business and the listed price was $500K.
You could pay the asking price or make a lower offer.
But sellers are trying to get the highest price while you want it as cheap as possible.
Because this is a negotiated transaction, the odds of getting the business cheap or discounted are pretty low.
But with the stock market, it’s exactly the opposite.
Every weekday, for 6-1/2 hours, the market gives you a new price quote on thousands of businesses for sale.
And depending on the mood of the market, one week the price of the business mentioned above might be $585K, while a few weeks later it might fall to $400K.
If you knew that the business would always be available for you to buy, and tomorrow the price would change, would you be in a hurry to buy?
This has been playing out in real time as I’d like to buy Costco (COST) outright.
But in my mind, it’s been too expensive!
Price to earnings or P/E tells us how much we’re currently paying for every $1 of a business’s earnings.
This week, just before their quarterly earnings were announced, Costco had a P/E of 53.55.
At that price, were you to buy, you’d pay $53.55 for every $1 of Costco’s earnings.
The chart above shows Costco’s 5-year P/E with an average of 38.65.
That tells me using this one metric, you’d be paying a premium of almost 40%!
This also means their stock is priced for perfection which tells us that the market has very high expectations for future growth of the underlying business.
And when there are very high expectations, any negative sentiment usually sends a stock lower.
Here’s what Costco reported for Q224:
- Earnings per share: $3.92 vs. $3.62 expected
- Revenue: $58.44 billion vs. $59.16 billion expected
They beat EPS but missed quarterly revenue by $720 million.
That sent shares down from an all-time high of $787 to $721, almost 8.5% on a revenue miss of 1.2%.
Exactly what happens when something is priced for perfection and exactly what I have been waiting for.
I’d like a P/E closer to their 5Y average, so I guess that gives a price of about $583 (5Y PE 38.65 x TTM EPS $15.1 = $583).
Will it ever get there?
I don’t know.
Nobody does.
But we do know that the market will be back with a new price for us on Monday morning.
And the best part is you don’t have to do anything.
You can just sit there and wait for the price quote that you like.
I’d love it if you hit reply and tell me what stocks you think are too expensive or priced to perfection that you’re waiting to buy.
😁Special THANK YOU to the (5) people who responded to the last newsletter!!
That said, let’s get to the moves made this week. And remember, you can always check out the PORTFOLIOS, the PODCAST, or see what’s cooking on the YouTube channel.
Dividends Received This Week ~$101.15
- Johnson & Johnson (JNJ) | $101.15
Dividends Received Year to Date~
$1,210.89
Stocks Bought (AVERAGE)
- 1 Johnson & Johnson (JNJ) | $159.95
- 7 Agree Realty (ADC) | $56.90
Notable Ex-Dividends This Week + SSD Score
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- 3/12 Public Storage (PSA), 4.09% | 96VS
- 3/14 Digital Realty Tr. (DLR), 3.26% | 80S
- 3/14 UGI (UGI), 5.99% | 60BS
- 3/14 Merck (MRK), 2.49% | 99VS
- 3/14 Coca-Cola (KO), 3.26% | 80S
- 3/14 Ares Capital (ARCC), 9.36% | 59BS
- 3/14 T. Rowe Price (TROW), 4.21% | 80S
- 3/14 Extra Sp. Storage (EXR), 4.30% | 80S
- 3/14 Walmart (WMT), 1.38% | 90VS
- 3/15 Prologis (PLD), 2.84% | 61S
🎙️Podcasts You Should Check Out!🎙️
🤑 Celsius (CELH) CEO John Fieldy was on OddLots to talk about the energy drink market and how they plan to keep growing. This was a very insightful and informative look into a ballooning market.
🎧 Do you remember the riddle of the expanding lilypad? The boys at We Study Billionaires had an enjoyable conversation about the basics of investing and financial independence. Very motivational and I had forgotten about the lily pad!!
Investing Newsletters You Might Like
⭐Ryne Williams writes a free weekly dividend newsletter and creates multiple top-notch YouTube videos every week. This is a community for dividend investors by dividend investors.
🤑Connor Von Ooyen used to build mobile games at Zynga, and became obsessed with the stock market, so he built an AI tool to scour the internet for the best stock market ideas and news and summarize straight to your inbox. Check out The Yellowbrick Road newsletter!
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Random music video I enjoy and you might too!
🎵Elvis – Suspicious Minds🎵
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With that being said, have a WONDERFUL week and I’ll see you in the next one.
