Although it feels bearish, so far 2019 has been bullish as the S&P 500 is still up 11% year to date. And quality stocks like Costco (NASDAQ:COST) are still thriving — a lot of them are near their all-time highs. Today I will discuss going long Costco stock, which is a retail winner.
The sector is falling off a cliff this week behind a heap of trouble from earnings from stocks like PVH Corp (NYSE:PVH), Abercombrie (NYSE:ANF) and Canada Goose (NYSE:GOOS). Wednesday’s retail drubbing caused even past winners like Lululemon (NASDAQ:LULU) to fall hard in sympathy.
At the heart of the problem is the fear of the tariff war and its impact on retail businesses. Consensus now is that the U.S. and China will not come to a deal, so the 25% tariffs will linger and most likely add the rest of $320 billion to the list. So input and resourcing costs will hamper the retailers for months to come.
Even though they’ve had ample warning of this impending situation, they still find themselves playing catch up. This is a bad habit in retail, since they did the same with the Amazon (NASDAQ:AMZN). They ignore its threat for 10 years … until it hit them like a bus. Many major companies folded and still more won’t likely survive.
So What About Costco Stock?
But today’s opportunity in COST stock is that there are exceptions to the retail curse. AMZN, COST and Walmart (NYSE:WMT) are three obvious winners now and for the long term. Dips are opportunities to go long.
Tonight Costco management will report earnings, so the open tomorrow morning is completely binary. First, we don’t know what they will deliver and second, we don’t know how traders will react to the information. The short term reaction has little to do with the quality of the report.
I am confident that management will not deliver a disaster, but this won’t matter for tomorrow’s price action. With how bad sentiment is around retail, it will take a small miracle to make Wall Street buy tonight’s earnings headline.
So how do I trade Costco through the event?
If I own the shares for the long term then I don’t worry about them here until the results change my thesis.
If I am looking to start a new position, then I have a decision to make. I can buy half now and half after the earnings just in case they sell the event. Or wait the whole thing out at the risk of missing out on a few upside ticks. This depends largely on personal preference and risk tolerance level. So the right answer varies based on time frame.
COST stock sits on solid fundamentals. It sells for 30 price to earnings ratio which is in line with WMT. It’s twice as expensive as, say, Target (NYSE:TGT), but half as expensive as AMZN. So it fits perfectly with my thesis that WMT and COST are best of the rest behind AMZN.
It is important to note that we are still in a middle of a market swoon, so I have to stay cautious. I don’t take full positions all at once, especially not ahead of earnings reports. So caution is a virtue when price action is so binary.
Luckily, this set of worries is different from what we had in December. This time the U.S. Federal reserve is our friend not a foe. They will not likely allow the yield curve to invert. So this week’s macroeconomic fears are more mongering than a legitimate concern. If I am right then good stocks like COST still have upside ahead of them this year.
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.