Shares of Costco Wholesale Corporation (NASDAQ:COST) fell once gain on Monday following Friday’s earnings bloodbath. That puts the two day loss at $12.46, or a nearly 7.5% drubbing. One would think, given the huge negative reaction in COST stock, that Costco had missed badly versus expectations.
Instead, COST actually beat analyst consensus on both the top and bottom line. Given that, I think the selling is way overdone and that Costco is due to consolidate around current levels.
InvestorPlace feature writer James Brumley does an outstanding job providing a deep drill down into the earnings report, noting the slowing earnings growth and ongoing fears of competition in the space from Amazon. Important to remember that COST did continue to grow, with 6.1 % same store sales handily exceeding expectations of just 5.2%.
I think the fear of getting “Amazoned” is overtstated at current prices.
The combination of higher earnings and lower stock price also means that COST stock is much more attractive from a valuation standpoint. The current P/E of 26 is approaching the cheapest levels of the past 5 years and roughly inline with the overall market.
The premium multiple that Costco had in comparison to the overall market has been eliminated. I would look to be a buyer on any further weakness.
Technically, Costco shares are getting oversold on a 9 day RSI basis with a reading below 30. Previous instances when COST stock was this oversold proved to be significant intermediate term lows.
Shares are also nearing the critical $150 support level which has proved to be formidable in the past, so COST is likely due for a bounce.
The recent carnage means COST options are trading near the recent highs in implied volatility (IV) even post earnings, with a current IV percentile of 74%.
This means option prices are comparatively expensive and favors selling strategies, making a bullish put credit spread the ideal way position.
The trade structure allows me to be a buyer on further weakness while collecting a rich premium now.
COST Stock Trade Idea
Buy COST Nov $145 puts and sell COST Nov $150 puts for $1 net credit.
Maximum gain is $100 per spread with maximum risk of $400 per spread. Return on risk is 25%. The short $150 strike is structured right at major support.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
