Even with the novel coronavirus taking a major toll on the economy, some businesses are weathering the financial storm. Costco (NASDAQ:COST) is an excellent example of this, as consumers continue to flock to the discount retailer for essential items. As a result, the Costco stock price has maintained a steady upward trajectory in recent months.
Along with traders, analysts have recognized Costco’s compelling growth outlook. And it’s easy to get caught up in the exuberance as the share price and analysts’ price targets move up in tandem.
Yet there are two sides to every story. While traders and experts extol Costco stock as the greatest thing since sliced bread, some insiders at the company might not envision more gains by the shares. If actions do indeed speak louder than words, then Costco’s shareholders might have something to worry about.
A Closer Look at Costco Stock
From a technical perspective, momentum-focused traders have much to celebrate when it comes to Costco stock. Over the past decade, its share price has marched relentlessly upwards. Every single dip of the stock has been a prime buying opportunity, though that doesn’t guarantee further gains going forward.
Sure, the onset of the coronavirus had an impact on Costco’s shares in February and March of this year. The dip wasn’t especially deep, though, and undaunted investors who held the shares fared well as the stock price fully recovered in July.
Value-oriented investors might be concerned about Costco’s somewhat elevated trailing 12-month price-earnings ratio of 41. At the same time, income-focused shareholders might not be too impressed with Costco stock’s measly 0.8% annual forward dividend yield.
Analysts Are Optimistic
With its moderately lofty valuation and such a small dividend payout, how could prospective investors justify buying Costco stock now? It seems that they would need to believe that Costco’s expansion will persist.
RBC Capital Markets analyst Scot Ciccarelli certainly appears to believe in Costco’s future growth prospects. In fact, he thinks that Costco should be able “to increase its U.S. store base by more than 400 warehouses or about 75% over time which, at current expansion rates, enables nearly 20 years of incremental unit growth.”
With that ambitious vision, Ciccarelli assigned an “outperform” rating to Costco stock along with a price target of $381. As he sees it, the retailer’s store expansion is an “underappreciated, long-term growth driver for Costco.”
Mirroring Ciccarelli almost to the dollar, Oppenheimer’s Rupesh Parikh placed a “buy” rating on Costco stock with a $380 price target. Meanwhile, Stifel analysts led by Mark Astrachan also assigned a “buy” rating to Costco shares while boosting their price target from $330 to $360.
J.P. Morgan analysts are also leaning bullish on Costco stock with an “overweight” rating and a $365 price target. Additionally, UBS released a “buy” rating on the stock as well as a price objective of $355.
A Warning Sign
Thus, Wall Street analysts are practically climbing over themselves to boost their Costco share price forecasts. That’s all fine and good, but what’s the outlook from the standpoint of the insiders at the company?
That is an important question to ask because corporate insiders have better access to the day-to-day operations of the company than the ivory-tower-analyst crowd probably would.
To answer this question, we should examine people’s actions, not their words. And strikingly, a rash of insider Costco share sales speaks volumes.
The following transactions all occurred in August:
- Executive Vice President and CFO Richard A. Galanti sold 1,754 Costco shares.
- Executive Vice President James C. Klauer dumped 4,000 shares.
- Director Susan L. Decker unloaded 2,500 shares.
We’re not talking about a penny stock, so those insiders sold stock with significant monetary value. Do these executives know something that we don’t? What have their eyes seen and their ears heard?
People sell their shares for various reasons, but the sheer volume of the insiders’ sale of Costco stock is unsettling. That alone should be a big enough red flag to cause prospective buyers of Costco stock to reconsider.
The Bottom Line
In this instance, I prefer to heed the corporate insiders’ actions rather than the analysts’ projections. Costco stock could still march upwards, of course, but the insiders’ selling is a warning signal that shouldn’t be ignored.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
