After an incredible rally to start the year, equity markets are under pressure this week. We have had sustained selling and all efforts to buy the dip have so far failed. In that sense, it’s reminiscent of what happened in December, which means companies reporting earnings this week are at a disadvantage during this headline sensitive time.
Last night, Costco (NASDAQ:COST) reported its earnings and Costco stock is rallying 5% on the headline. This is despite the fact that markets are under tremendous pressure from China-based headlines.
So for now, the bears are not looking to fight it.
So let’s start with the fundamentals first. I am a fan of the company and I am a weekly customer. I think it’s more than just a shopping trip but more of an experience. I often run into friends while there so it’s almost like a trip to Starbucks (NASDAQ:SBUX).
COST has a proven management team that always delivers on its plans. They almost never give Wall Street specific reasons to sell COST stock. Last night, management did it again, as they blew away the earnings-per-share expectations and that’s the literal bottom line.
Moreover, they continue to grow total sales up 7%, which was a bit lower than expected but they made it up in other areas. While the overall comparable sales were impressive, their e-sales comps were up 25%. This is the trend to e-tailing that matters most to the retail sector investors. The impression is that online sales bring higher margins.
Another saving grace for Costco stock is that management does not provide forward guidance. That is the one headline sellers love to sink their teeth into on earnings reports. The company could deliver the best report but if they show forward caution, the stock falls. Not for COST stock; management left no opportunity for sellers to act. The bears lack any reason to sell it on this headline.
This is how it should be for every stock, because the forward guidance is merely an opinion or forecast and those can be wrong. It doesn’t mean that the company is deteriorating. Nevertheless, Costco stock today is rallying and celebrating the news.
How to Approach Costco Stock After Earnings
As much as I like the fundamentals, COST stock is not cheap. It sells at a price-to-earnings ratio of 30. In absolute terms, I compare that to say Apple (NASDAQ:AAPL) or Facebook (NASDAQ:FB) and it’s 40% more expensive. Or relatively speaking, it is twice as expensive as Target (NYSE:TGT). Only Walmart (NYSE:WMT) is more expensive among the retail stocks I track. TGT stock is not only cheaper, but it is also better. Year-to-date, TGT is up twice as much as COST.
Nevertheless, the high P/E is not a deal breaker for me because if markets are rallying, then Costco stock is also with them. In other words, I’d own it for the long term. If that’s the case, then I don’t have to be surgical with my entry point and I should just buy it.
But for the rest of us that like to enter a stock at optimal spots, there are lines to watch.
The zone around $220 per share has been pivotal since last July. Usually, those levels of contention are resistance on the way up. But here, COST stock is beating them and if it closes above the zone, then the bulls could have solid footing to drive even higher into it.
In this scenario, Costco stock would have a trend line breakout opportunity somewhere around $230 per share and it is a moving target. Since it set a new high last September, the stock has set a trend of lower highs. When bulls break through them, they tend to overshoot higher. This is easiest to see on the weekly chart.
Shorter time frames show that the upside opportunity is at $232.50, but that level is also resistance. There is another potential stalling point at $29.80 from the failure on Dec. 12. For support, in case this spike fades for whatever reason, I’d look for the same pivot levels around $220 to continue to hold.
In summary, these minute levels won’t matter much in the long run. COST is a company set to continue higher and if my assumption is that markets will be higher in the future, then so will Costco stock. However, investors should be cautious during this macro-sentiment crisis through next Wednesday.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
