Should Costco Be in Your Portfolio?

With shares of Costco (NASDAQ:COST) trading around $114, 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.

Earlier this quarter, Sinegal James D, who is Director at Costco, sold 8,000 shares at $115.92 per share for a total value of $927,360. The shares recently traded near $115 per share.

T = Technicals on the Stock Chart Are Strong

Costco stock has been exploding higher over the last few years. The stock is currently trading below all-time high prices so it may need time before it gets going once again. 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

19.43%

76%

75%

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

September Options

Flat

Average

October 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 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 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

-0.94%

1.27%

-0.60%

1.92%

Costco has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings 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

16.01%

7.09%

7.52%

11.53%

9.43%

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. A recent insider sale seems to not be having a significant effect on the company. The stock has been exploding higher and is now trading slightly below highs for the year. Over the last four quarters, earnings and revenues have been rising, however, investors in the company have had mixed feelings about these announcements. Relative to its peers and sector, Costco has been a year-to-date performance leader. Look for Costco to OUTPERFORM.

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