Will Costco Continue This Explosive Move?

With shares of Costco (NASDAQ:COST) trading around $112, 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. Costco buys the majority of its merchandise directly from manufacturers and routes it to a depot or directly to its warehouses. The company’s typical warehouse format averages approximately 143,000 square feet and operate on a seven-day, 69-hour week. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only. Consumers looking for competitive prices opt to shop at Costco because of the discounts seen on bulk items. As consumers continue to stock up and see fewer and less expensive trips to the grocery store, Costco is poised to see rising profits.

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T = Technicals on the Stock Chart are Strong

Costco stock has seen an explosive move higher over the last few years. This run has shot the stock up to all-time high prices and it doesn’t seem likely that it will stop just yet. 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

20%

93%

90%

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

June Options

Flat

Average

July 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

37.78%

30.14%

29.13%

20.55%

Revenue Growth (Y-O-Y)

8.29%

9.65%

14.34%

8.25%

Earnings Reaction

1.27%

-0.6%

1.92%

1.4%

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

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P = Average 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

14.07%

18.29%

16.62%

17.48%

14.01%

Costco has been an average performer, year-to-date.

Conclusion

Costco provides essential products and services to a growing audience looking for efficient shopping trips and relatively inexpensive products. The stock has surged higher over the last few years and is now trading at all-time high prices. Earnings and revenue figures have been growing at an impressive rate which has really excited investors. Relative to its peers and sector, Costco has been an average year-to-date performer. Look for Costco to OUTPERFORM.

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