Is Costco Still A Hot Stock?

costco2

With shares of Costco (NASDAQ:COST) trading around $115, is COST an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Costco is engaged in the operation of membership warehouses in the United States and Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Australia, and through majority-owned subsidiaries in Taiwan and Korea. The company’s depots receive container-based shipments from manufacturers and reallocate these goods for shipment to its individual warehouses, generally in less than 24 hours. Costco’s typical warehouse format averages approximately 143,000 square feet, where many products are offered for sale in case, carton, or multiple-pack quantities only.

Costco looks to increase profits this summer as consumers aim to stock up on their favorite seasonal items. However, the company is not as popular as Wal-Mart (NYSE:WMT) or Target (NYSE:TGT), which also provide general items such as sunscreen, pool gear, and bathing suits. But offering a large selection of bulk products at affordable prices makes Costco a go-to location for many shopping needs. Look for Costco to continue to provide products at sizes and prices that consumers and companies demand.

T = Technicals on the Stock Chart are Strong

Costco stock has been exploding since establishing lows in early 2009. The stock keeps going and going and is now trading near all-time high prices. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Costco is trading above its rising key averages, which signal neutral to bullish price action in the near term.

COST

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Costco options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Costco Options

17.43%

3%

0%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the past 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of Thursday, there is average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings Are Rising Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Costco’s stock. What do the last four quarterly earnings and year-over-year revenue growth figures for Costco look like and, more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

18.18%

37.78%

30.14%

29.13%

Revenue Growth (Y-O-Y)

4.86%

8.29%

9.65%

14.34%

Earnings Reaction

-0.94%

1.27%

-0.60%

1.92%

Costco has seen rising earnings and revenue figures over the past four quarters. From these numbers, the markets have been optimistic about Costco’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Costco stock done relative to its peers Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Pricesmart (NASDAQ:PSMT), and sector?

Costco

Wal-Mart

Target

Pricesmart

Sector

Year-to-Date Return

16.36%

13.60%

22.41%

14.99%

15.86%

Costco has been a relative performance leader, year-to-date.

Conclusion

Costco is a warehouse chain that sells large and bulk items to consumers looking to save an extra few bucks. The stock has been on an explosive run and is now trading at all-time high prices. Over the past four quarters, earnings and revenue figures have been on the rise, leading to optimistic investors in the company. Relative to its peers and sector, Costco has been a year-to-date performance leader. Look for Costco to continue to OUTPERFORM.

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