Costco, Lowe's, Five Below, Dollar Tree downgraded due to 'extreme' valuations

By Steve Gelsi

Group of retailers currently appears to be 'priced for perfection,' even with positive economic outlook, analyst says

Gordon Haskett analyst Chuck Grom on Wednesday downgraded four retailers because their stocks are currently "priced for perfection" after an equities rally in recent months.

While Grom remains upbeat on the U.S. economic outlook, some negative trends include higher gasoline prices, the "underappreciated" risk of the 2024 elections and an unfavorable holiday setup this year, with five fewer shopping days.

There's also uncertainty over home-improvement activities if mortgage rates remain elevated.

"The move higher in a host of stocks we cover where valuations have gone to such extreme levels has us asking ourselves ... did we go too far, too fast?" Grom said. "Said differently, at a high level, the group seems near 'priced-for-perfection' today ... with history having taught us that perfection is a rare feat."

Grom cut his rating on Costco Wholesale Corp. (COST) to accumulate from buy and kept the stock's price target at $775. The stock has risen by about 7.8% so far this year, compared with a 9.1% rise by the S&P 500 SPX.

"Costco's stock has been rewarded over the decades for its steady and consistent growth with significant share price appreciation and premium multiple, but with the valuation sitting at record highs, any hints of a slowdown (or tweak in the strategy) could leave shares vulnerable to a pullback," Grom said.

Gordon Haskett reduced its rating on Dollar Tree Inc. (DLTR) to hold from buy and cut its price target to $140 from $150. The stock is down by 5.1% so far this year.

"The macro backdrop has certainly contributed to recent trends, but the planned closing of 600 Family Dollar locations suggests there are underlying structural issues as well ... a reservation we've long held given the banners' less than favorable real estate locations (amongst other structural factors)," he said.

Gordon Haskett also downgraded Lowe's Cos. (LOW) to hold from accumulate and kept its price target at $245. Lowe's stock is up by 9.8% so far in 2024.

"While mortgage rates have come down modestly from recent peaks and housing activity ... has shown modest improvement from recent lows, slowing demand and smaller projects could remain a [comparable store sales] headwind," Grom said.

Five Below Inc. (FIVE) was also downgraded to accumulate from buy, with a price-target cut to $200 from $210. The stock has fallen 19.7% so far this year.

Among the 23 stocks covered by Gordon Haskett, Grom has buy ratings on Target Corp. (TGT), Dollar General Corp. (DG), Dick's Sporting Goods Inc., (DKS), Wayfair Inc. (W), TJX Cos. (TJX), Ross Stores Inc. (ROST) and Walmart Inc. .

-Steve Gelsi

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04-03-24 0922ET

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