Immediately after the opening bell, you sell 40 shares of Costco stock for approximately $860. After the transaction, the Jim Cramer Charitable Trust will own 40 shares of Costco stock, reducing its stake from 1.8% to about 0.9%. Following Jim’s comments on Sunday that we may need to do something about weak retail inventory, we decided to cut our Costco position in half. While it’s still too early to call Costco stock a battleground, we believe action is needed even after another mixed quarter. At the heart of Costco’s problem is a persistent decline in membership renewal rates. We’ve long believed that consumers will never stop subscribing to Costco, given the incredible value that membership provides. However, over the past four quarters, renewal rates have fallen from 90.4% to 89.7% worldwide, and from 92.8% to 92.2% in the United States and Canada. This is primarily due to the increased churn rate of online shoppers. Additionally, management said on the earnings call that this customer attrition will continue over the next few quarters. Renewal rates remain very high, and there are no signs that Costco’s business is in serious trouble. However, different rules apply to stocks. From that perspective, the company’s stock price will have a hard time maintaining its high valuation of approximately 44 times future earnings per share, as management is unable to quickly reverse the decline. Remember, most of the company’s profits come from membership fees, not from retail business sales. Therefore, slower growth in paid memberships and continued decline in renewals could lead to slower revenue growth, weighing on PEs that multiple investors are willing to pay. This sale represents a 200% gain on the shares purchased in early 2020. (The Jim Cramer Charitable Trust is a long-term cost. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
