Costco upgraded to buy; valuation near fair value ($843 vs market $897) after sell-off.

Costco is scheduled to announce its quarterly financial results on September 24, 2026. This comes at a time when Costco's stock is suffering a decline.

For the first time in a long time, Costco shares have fallen by about 20% from their highest levels. Costco's stock was trading near $1,100 a few months ago, and is now trading below $900.

Therefore, investors are wondering whether they should buy Costco shares before the next investor update. Let's start with Costco's sales figures, where the company's management indicates that sales at similar stores in the United States rose by 9% compared to the same month last year when looking at August sales.

However, if we look at comparable retail sales excluding fuel prices, US retail sales rose by 5.6%, and in Canada by 2.8%. Digital sales recorded a growth of 17.9%, whether viewed with or without fuel, as fuel is not sold digitally.

Costco's online business is performing reasonably well. Remember that Costco does not focus on online sales like its competitors such as Walmart and Target, but it still maintains a presence and is expanding well in this category.

In the long run, Costco has done an excellent job of increasing revenue, especially when compared to the number of its stores with Walmart and others.

Costco has fewer than 1,000 stores worldwide, closer to 900, and has generated $293 billion in sales over the past twelve months.

So, when you look at Costco in terms of sales per store, it outperforms any other traditional retailer you can imagine. Of course, Costco is not a highly profitable company if measured by profit margins, and it does so intentionally.

They find ways to buy products at lower prices using an excellent buying process, and when they get deals and discounted prices, they pass those savings on to customers. They want to provide a great shopping experience for customers, an experience where they feel comfortable knowing they are getting the lowest prices.

They don't even need to compare, because they have come to trust that Costco offers them the best possible price. Costco is rewarded with a very high membership renewal rate, exceeding 90% in the United States.

Therefore, current members renew their membership in more than 90% of cases. This is where Costco earns the bulk of its profits, from selling those subscriptions. They then make small profit margins from product sales throughout the year.

Overall, Costco achieved an operating profit margin of only 3.8%. People are often surprised when I mention this figure, especially non-investors, those who are not familiar with investing, profit margins, financial analysis, and so on.

When I talk to family and friends, we all mostly use Costco. When he told them that for every $100 of sales, Costco made less than $4 in profit.

When I present them with this figure, I see a collective shock in the room because Costco is making such small profit margins on sales.

I think people assume that Costco makes a lot more profit when products are bought from them, but that's not true. They pass those better prices on to customers.

Costco is also very efficient in allocating capital. If you visit a Costco store, it's likely that the store was crowded, and they do that intentionally. They are very conservative in the number of new sites they open.

In addition, Costco’s low prices allow them to rotate inventory at industry-leading levels, which also delivers a better return on invested capital because they sell products before they even have to pay suppliers, right?

In most cases, Costco sells those products before it even has to pay these companies. Therefore, they reimburse them for the money that customers pay them, and this has resulted in Costco achieving industry-leading returns on invested capital of 22.6%.

You can compare that to Home Depot, Walmart, Target, and Costco; it outperforms them all.

One of the surprising things that this recent heavy sell-off of Costco has created is a situation where the stock appears to be valued at its fair value.

This hasn't happened in a very long time. Costco's business is so excellent that it is usually sold at a high rating (premium). Even today, the price remains high, but this premium has decreased.

It is currently trading at a forward price-to-earnings ratio of 36, very close to Walmart at 33, and near the lowest level at which Costco stock has traded. You have to go back to the whole of 2024 to see a valuation that was close to these levels.

Similarly, I updated my discounted cash flow valuation model for Costco, and the fair value is now very close to the actual market price at $843 as a fair value compared to the market price of $897.

This means an overvaluation of only 6%. This clearly falls within my safety margin. This is the closest fair price Costco has had in a very long time. Well, for the first time in years, years since I started following Costco stock, I'm upgrading the stock rating to "buy".

Now, the last time I rated Costco stock as a "buy," I think I'll need to revise my historical ratings. That was probably in 2021 or 2022.

It has been several years since Costco stock approached levels that would allow me to upgrade it to a "buy" rating, given that the valuation has always been higher than the fair value estimates I have calculated.

So, I'm updating this on September 21, 2026. Now, to answer the question, should you buy it before or after the profits?

Well, this is a situation where I feel neutral towards buying before or after. Therefore, I would buy half the quantity before earnings and the other half after if you are interested in buying Costco stock at these levels.

However, this is a rare opportunity I see here with Costco stock. One of the best companies in the world that is rarely traded even at a reasonable valuation.

It usually trades at a high valuation, and this has been the case for a large portion of the few decades that Costco has been in, and certainly in the decade that I have followed Costco stock, it traded at a high valuation for most of that decade.