(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Costco Wholesale Corp.'s (COST) stock has soared nearly 42% over the past year, nearly triple the pace of the S&P 500. That gain has left Costco's stock valuation at nose-bleed levels. The two last times its shares were valued at these lofty heights—the highest one-year forward P/E ratio in years—it fall sharply.

A close look at the numbers tells the story. Shares of the wholesaler are forecast to have a stellar fiscal 2018. Costco is currently in its fiscal fourth quarter, with earnings expected to grow by nearly 19%, but that growth rate is forecast to fall materially in 2019 and then again in 2020. However, investors may have become too enthusiastic, bidding shares up to a valuation of nearly 26 times 2020 earnings, much higher than the S&P 500's one-year forward P/E ratio around 17. When the stock has climbed to valuations greater than 25 times earnings in the past, shares have declined by roughly 13% or more. 

COST Chart

COST data by YCharts

Expensive Stock

Costco's stock is now trading at its highest valuation going back to September 2013 at 25.9 times fiscal 2020 estimates of $8.50. The stock has reached a valuation above 25 just two prior times, August 2016 and again during June 2017.  After reaching such a lofty valuation, the stock pulled back by roughly 13% in the fall of 2016, and by more than 16% in the summer of 2017. Now Costco is trading at a valuation higher than those previous two periods, leaving shares susceptible to a steep pullback. 

Fundamental Chart Chart

Slowing Growth

Earnings growth for Costco is expected to slow materially over the next three years, slowing from roughly 19% in 2018,  to 11.7% in 2019 and 9% in 2020. It leaves shares of Costco trading at a steep earnings multiple, at nearly three times its fiscal 2020 earnings growth rate, giving the stock a PEG ratio of almost 2.9. 

COST EPS Estimates for Next Fiscal Year Chart

Sales Won't Save It

Revenue growth won’t save the company either, as it is expected to be subpar over the next three years as well, growing by 9% in 2018, and just 6% in 2019 and 2020. 

With Costco trading at an above-market multiple and expensive when adjusted for growth, the stock appears poised to stage a pullback. It will take a round of big earnings beats, and upwardly revised earnings guidance to keep the valuation from getting even higher, while a miss on the top or bottom lines may prove disastrous. 

Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.