COST Stock: Costco a Buy on This (Prolonged) Dip

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Costco Wholesale Corporation (COST) ran up nicely to start the year, mostly thanks to a 10% pop in early February on the promise of a special dividend. The performance seemed further proof that COST stock was still the low-cost leader with consumers.

costco earnings cost stockHowever, Costco stock ran into a snag in February. First, it saw some downgrades after earnings on anticipation of a strong dollar taking a bite out of profits for the rest of the year. Then the company revealed it was parting ways with American Express (AXP), previously a quite profitable partnership for the wholesale retailer.

But after COST stock bottomed out at around $135 a share at the end of June — a 13% decline or so from its early 2015 peak — Costco has been mounting a comeback.

And that means it may be time for investors to give this retail stock a second chance or add to existing positions in Costco stock.

For starters, let’s remember that the long-term trend is decidedly higher for Costco. In the past 12 months, COST stock has returned 27% vs. about 7% for the S&P 500. And longer-term, the five-year returns of Costco stock are about 195% vs. about 110% for the benchmark S&P in the same period.

The downgrade we saw from Deutsche Bank in February based on anticipation of slower sales and forex challenges has been fully priced in — in fact, Costco stock is right around the new $142 target DB slapped on it when it reduced its forecast from “buy” to “hold.”

BMO Capital Markets actually just came out and said that Costco has a strong outlook for “base comps” excluding short term currency woes, and is anticipating a double-digit move higher. Similarly, Oppenheimer just upgraded COST stock days ago to “outperform,” calling it a “rare opportunity” with 15% upside from here.

Admittedly, a forward price-to-earnings ratio of 25 is still a bit rich for a brick-and-mortar retailer. However, Costco continues to grow its earnings and revenue reliably; this fiscal year, EPS will rise 12% and in FY2016 earnings are projected to jump another 9%. That kind of double-digit growth is difficult to find in many industries, let alone retail.

And remember, this isn’t a retail stock that’s reliant on fads to make money from shoppers. Costco tallied more than 76 million members at the end of last year, according to its annual report, and more than $2.4 billion in revenue recorded from dues from these members.

These members provide a great baseline for COST stock that ensures stability and strong cash flow in any environment.

So while the decline in recent months has been disappointing, don’t count out Costco yet. The rally in the last few days may be a sign that the bottom is in, and COST stock is about to break out much higher.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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