Should Costco Be In Your Portfolio?

With shares of Costco (NASDAQ:COST) trading around $109, 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 consumable products are offered for sale in case, carton, or multiple-pack quantities only. 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 the products, at sizes and prices, that consumers and companies demand.

T = Technicals on the Stock Chart are Strong

Costco stock has seen an explosive move higher in its stock price. The stock is now digesting gains from a recent bullish run so it may pause here for a breather. 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 slightly above its rising key averages which signal neutral to bullish price action in the near-term.

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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

21.42%

90%

88%

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

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an 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 very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing 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 revenue growth (Y-O-Y) 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

1.35%

0.85%

3.3%

3.07%

Costco has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Costco’s recent earnings announcements.

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P = Excellent Relative Performance Versus Peers and Sector

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

Costco

Target

Wal-Mart

Pricesmart

Sector

Year-to-Date Return

11.24%

19.59%

10.77%

8.92%

10.85%

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

Conclusion

Costco provides products and services in sizes and prices that have really impressed investors in recent years. The stock has witnessed an explosive move higher in its stock prices that has taken it to all-time high prices. Over the last four quarters, earnings and revenue figures have been rising which has really pleased investors. Relative to its peers and sector, Costco has been a year-to-date performance leader. Look for Costco to OUTPERFORM.

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