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Wells Fargo downgrades Costco, says shares are too expensive given the ‘hurdles’ ahead

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Costco ‘s stock is too expensive given the headwinds the company faces in the month ahead, according to Wells Fargo. “COST remains a high-quality name, but we see a number of hurdles in the path of this rich multiple stock moving forward,” wrote Edward Kelly as he downgraded shares to equal weight from overweight in a note to clients Monday. Kelly also lowered his price target to $490 a share from $600, saying the retailer isn’t immune to the weakening consumer and food disinflation that could slow comps going forward and that investors are paying a large premium for the stock. “We have become increasingly concerned about how staples retail stocks react to slowing top-line momentum, and COST may have more exposure to this issue given its relatively high multiple,” he said. Costco has seen record growth over the past years, resulting from both the pandemic and rising inflation that forced customers to seek out value. But those tailwinds may be coming to an end. Kelly also sees currency and fuel risks and currency pressures ahead for Costco, which could provide as much as a 5% and 3% headwind to earnings, respectively. “Fuel margins reached historic levels over the past few quarters, but this tailwind now represents a difficult comparison,” he said. Wells Fargo’s new price target suggests shares will remain range bound in the near future, having fallen already more than 14% this year. If momentum slows more than anticipated, Kelly estimates a 15% to 20% downside risk to the stock ahead. “We also are wary of how COST cycles the recent period of historic EBIT margin expansion given its typical stability and customer-first reputation,” Kelly said. “In the end, we see more risk to consensus estimates going forward than upside potential, not a good set-up for this name given its valuation.” — CNBC’s Michael Bloom contributed reporting

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