Is Costco Wholesale Corporation (COST) Stock Readying An Out-Performance?
If you like to shop after a price drop, consider shares of Costco Wholesale Corporation (NASDAQ:COST). But if you want added buyer protection and enjoy additional cost-cutting measures, a modified bullish fence on COST stock is priced to own. Let me explain.
Source: Mike Mozart via Flickr (Modified)
Most of us enjoy a good bargain. And as many shoppers are aware, Costco is able to feed that desire. In fact, this past week an analyst note from BMO Capital Markets confirmed the club wholesaler offers the lowest prices and speediest shipping for members preferring its online service.
The report is a minor ding in the armor of e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN). Moreover, with Costco’s strong fundamentals, healthy membership renewal rates, growing online presence and continued successful expansion of its global brick and mortar operations and recent price cut to COST stock — it’s another reason to believe shares are offering value off and on the price chart.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
COST Weekly Price Chart
It hasn’t been much of a bull market in COST the last couple years compared to the performance of the broader averages. In fact, since first carving out a corrective base beginning in early 2015, shares of Costco are up less than 3% and approximately 6% if the modest dividend is factored in. At the same time, the Dow Jones Industrial Average is up more than 35%.
The question is, can this period of relative under-performance be setting up a prolonged period of out-performance in COST stock? While there are no guarantees, the weekly price chart in Costco does offer bullish investors more than simply hope. In this case, shares have begun to turn higher off channel and price congestion support and with the backing of a bullish stochastics picture.
COST Stock Modified Bullish Fence
Reviewing Costco’s options and given our bullish interpretation of the price chart, one spread which looks attractive is a ‘cost-cutting’ modified bullish fence. Specifically, and with COST at $161.29, buying the November $170/$175 call vertical and selling the November $155/$150 put spread is priced for a credit of 10 cents and favored by this strategist.
What’s this combination offer bullish investors? For starters, if COST is between $155 and $170 at expiration, the trader keeps the full credit. That’s decent protection on the downside, though less attractive if Costco shares rally by more than 10 cents and towards $170.
Next Page If shares of Costco fail to hold support and break the July low of $150, at expiration the trader is on the hook for $4.90. That amounts to roughly 3% of COST stock risk and compares favorably to a loss of nearly 7% facing shareholders. As this modified fence maintains limited risk, if Costco fell even harder, the out-performance is even stronger.
Earnings Rally in COST Stock
On the upside and if our forecast of higher prices in Costco pans out, a move through $175 can maximize the combination’s profit potential of $5.10. That math is the result of the 5 point wide vertical expanding to $5.00 and factoring in the small credit.
Capturing the full profit would require a move of 8.5% in COST stock, but with earnings in early October, a rally of that magnitude is certainly possible.
Lastly, in order to breakeven at expiration shares of Costco require a price improvement of 5.4%. Of course that’s more approachable than 8.5%, though investing to simply breakeven isn’t a formula for long-term success. The good news is due to the spread’s long directional bias, interim profits are possible without the stock needing to clear the $170 call and the vertical moving in-the-money.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
More From InvestorPlace
The post Is Costco Wholesale Corporation (COST) Stock Readying An Out-Performance? appeared first on InvestorPlace.
