Can Costco Stock Hold Up Amid Another Selloff?

Costco Wholesale (NASDAQ:COST) has been a stud in this tough tape. While shares initially got caught up in the selloff, Costco stock has had a robust recovery off the lows. In fact, shares of Costco are just 1.6% off its all-time highs.

Can Costco Stock Hold Up Amid Another Selloff?

Source: ilzesgimene / Shutterstock.com

On the one hand, that shows great relative strength vs. the broader market. Some retailer stocks are doing really well right now, like Costco and Amazon (NASDAQ:AMZN) — the latter of which just hit new 52-week highs. On the other hand, those gains could make the stock vulnerable.

So while it’s encouraging to see big gains here, these stocks could be ripe for profit taking if the market takes a turn for the worst.

A Closer Look at Costco Stock

Can Costco Stock Hold Up Amid Another Selloff?
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Source: Chart courtesy of StockCharts.com

From peak to trough, Costco stock fell just 13.6%. Man, that’s impressive considering the S&P 500 fell more than twice that amount. Even Amazon fell more than 25% from its 2020 high to the March low. Costco shares have now rebounded nearly 16%.

The stock market has been resilient over the past few weeks, pushing higher despite elevated economic concerns and persisting worries about the novel coronavirus. However, we’re approaching an interesting hurdle in the road. Earnings seasons is kicking off — which hasn’t been all that inspiring so far — while oil prices plunge below $20 despite OPEC+ reaching a production cut agreement just a few days ago.

With the S&P 500 25% off the lows, it’s fair to wonder if we’ve rallied too far, too fast. If that’s indeed the case and the broader market comes under pressure, Costco stock is unlikely to be immune. Granted, it may very well hold up better than the overall equity markets — again displaying relative strength. But that doesn’t mean it won’t go down.

Above is a weekly chart of Costco. The stock did a good job of holding the 50-week moving average on the downside and putting in a series of higher lows, evidenced by uptrend support (purple line). Furthermore, bulls regained control when COST reclaimed the $300 to $305 area.

While we like Costco stock for the long term, we have to consider the risk/reward with shares near $320. While the stock could push up to resistance around this mark and breakout to new highs, that feat may be difficult in the current environment. Instead, investors should aim to scoop this name up on a discount.

Why Like Costco Wholesale?

Bulls came rushing back to Costco stock in the same way that customers rushed into stores. Because of the coronavirus pandemic, consumers panic-purchased food, alcohol and key supplies. That spurred sales higher for companies like Kroger (NYSE:KR), Target (NYSE:TGT) and Costco.

Last month, Costco beat on earnings and revenue expectations. Additionally, comparable-store sales rose 7.9% vs. expectations of 5.7%, while online sales rose 28%. February comps were robust, rising more than 11%, as were March comp-store sales, which climbed 12.3%. Anticipation of strong March figures was a key reason we liked the stock so much last month.

That said, some analysts feel less bullish on the stock now. JPMorgan analysts expect some “normalization” in sales this month. They estimate comp-sales to grow “just” 5.7% — which would be great for most retailers — and believe consensus estimates for Costco’s fiscal third quarter are too high. As a result, they cut their earnings estimates from $2.10 to $1.75 per share for the quarter.

We’re not basing our bullish opinion on one quarter worth of business for Costco. Here’s a retailer that, for decades now, has proven it can deliver outsized growth. Customers love it, and the company is a best-in-class operator within the retail sector. Harsh economic times may or may not be around the corner. But with Costco’s low prices, it should remain popular with consumers.

Can Costco Stock Hold Up Amid Another Selloff?
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Source: Chart courtesy of Statista, Source from Coresight Research; Various sources (Company reports)

Beyond the Coronavirus

Our bullish thesis goes beyond just a multi-month spike in sales due to the coronavirus. Costco continues to make efforts to grow its online business. As the retail landscape continues to evolve, e-commerce continues to play a larger and larger role.

There’s a reason why the retail sector continues to see a large number of store closures despite the economy coming into 2020 in a strong position. That was a trend long before the coronavirus came along, and it’s an event that will likely fuel the e-commerce transition.

Several big-box retailers are among those taking notice and are making digital transformations as a result of these changes. That includes Costco, which has done a great job pivoting online, along with Target, Home Depot (NYSE:HD), Best Buy (NYSE:BBY) and Walmart (NYSE:WMT), among others.

So, for that reason, Costco stock remains a long-term buy.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


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