An Earnings Price Cut Will Hurt Costco Stock, But Don’t Sell the News
With earnings right around the corner, Wall Street is singing the praises for Costco (NASDAQ:COST), but if it’s a real bargain you’re after, waiting on a likely “sell-the-news” reaction is the better way to prepare for shopping Costcostock. Let me explain.
From InvestorPlace, to research outfits like Zacks and the Motley Fool, it seems like everyone on Wall Street is upbeat about Costco delivering a seasonally cheery gift to investors this quarter. And that’s concerning in our estimation.
Sure, Costco has done great work continuing to build both its brick-and-mortar and digital presence while keeping the beast that is Amazon (NASDAQ:AMZN) at bay. And no doubt, along with Walmart (NYSE:WMT), COST stock is one of the better-looking recession plays in retail given its wholesale pricing on non-discretionary consumer staples. But that’s not all that matters right now.
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Bottom, top and squiggly-line on the Costco stock chart, Wall Street’s enthusiasm and optimism surrounding COST has been well-telegraphed. As much and in a difficult bull market coming to terms with its age, shares are likely to fall victim to a sell-the-news response when earnings are unwrapped, rather than a well-received Secret Santa gift for bulls.
COST Stock Weekly Chart
Costco Stock by the Numbers
Looking at the weekly chart of COST and as noted above, overall shares look great compared to the market and most large cap equities these days. The larger uptrend is still intake and shares of Costco are testing the former resistance line for support. So, what’s the problem?
Aside from being worried COST is a rat posing as a bull, if we dig a bit deeper shares are showing actual signs of topping after what’s been a phenomenally long multi-year rally.
Over the past three months Costco has established a descending triple top with a bearish-looking stochastics set-up. It’s our contention COST stock’s relative strength is actually a last gasp effort at drawing in buyers to pay a large premium compared to the market in an environment where that type of investing has largely failed to work.
COST Stock Trade
Given what’s been said, I suppose Costco stock is setting up as a short position. Personally, I frown upon playing any earnings event with a standalone stock position. They’re simply too much of a crap-shoot.
The trade I think Costco bulls should be prepared for is a post-earnings buying opportunity if a hard-hitting, sell-the-news reaction occurs.
Given the S&P 500’s own 12% correction compared to Costco’s 11% decline and the bearish state of most large cap stocks these days; I’m thinking a correction of 18% down to $200 in COST stock is very approachable without too much “ho-ho-hope” for patient COST stock bulls in the weeks ahead.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.
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