Is It Time to Buy Costco Stock?

Costco (COST) stock is perking up ahead of tonight’s July sales numbers release. The stock is still more than 10% below its highs from June, before Amazon (AMZN) announced its decision to buy Whole Foods (WFM). So is it time to buy Costco stock, or is there more downside in the cards?

Costco Stock: The Chart

Let’s start with the chart. Costco was trading at an all-time high before the Whole Foods announcement—but the stock’s advance was already looking a bit long in the tooth.

For one thing, after a seven-year advance, COST stalled out in 2016: the stock opened at 159 in January 2016 and closed out the year just one dollar higher—at 160. And over the past 12 months, COST suffered several high-volume selloffs—first in September 2016, when August sales numbers disappointed, and again this past March, after second-quarter results missed estimates.

But the selloff after the Whole Foods announcement was the worst yet. You can see on the chart that volume remained extremely elevated for over a week, as heavy selling pushed the stock down. COST dropped almost 14% and broke through both its 50- and 200-day moving averages to the downside, where it remains.

At this point, COST looks broken, meaning that the selloff after the Whole Foods announcement broke the stock’s uptrend and created an obstacle that will be very hard for the stock to surmount going forward.

Costco Stock: The Numbers

Of course, the chart is only half the story. What about the numbers?

Analysts expect Costco to deliver 7.8% sales growth and 8.3% EPS growth this year. However, estimates have fallen since the start of the year, when analysts were expecting growth closer to 10%. And sales growth is expected to decelerate next year, to 5.4%. Analysts do expect EPS growth to accelerate, to over 10%, but estimates have been falling, with five downward revisions in the past 60 days.

The culprit, again, is Amazon. While Costco’s warehouse model has helped the company thrive for longer than most competitors, investors are increasingly concluding that no bricks and morter retailer is immune from the Amazon effect.

According to a recent Bloomberg study, Amazon has corporate America more worried than even President Trump. Amazon was mentioned on earnings calls 165 times over the past month, while Trump was mentioned only 32 times. And over the past year—which includes Trump’s election and inauguration—Amazon garnered 800 more mentions than the President.

If the Whole Foods purchase was just the latest salvo in Amazon’s gradual domination of the entire consumer sector, no one is safe.

Value investors will want to keep that in mind when deciding whether Costco stock is a bargain today. COST is currently trading at a P/E of 27.5, which is lower than its average 2016 P/E of 29. But it’s not historically low, it’s right in line with Costco stock’s five-year average P/E ratio of 27.6.

Costco’s forward P/E is also lower than it was last year—24.6 vs. 26.8—but in line with its five-year average of 24.2. And if earnings estimates continue to fall, COST’s forward P/E will gradually increase.

Is It Time to Buy Costco Stock?

Even after the Whole Foods announcement, Costco still isn’t much of a bargain.

Estimates don’t paint a particularly strong growth picture.

And the chart suggests more downside is more likely than a rebound.

In other words, the bounce in COST over the past few days is probably nothing more than that—a bounce—and investors should continue to avoid the stock.

Editor’s Note: Chloe added Costco (COST) to the Dividend Growth Tier of the Cabot Dividend Investor portfolio in February 2014, and sold the stock in March 2017 for a 49% gain.

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Costco (COST): Best retail stock

The stock is Costco Wholesale Corporation (COST), well known as one of the founders of the warehouse shopping movement.

Today, Costco is not only the largest warehouse club operator in the world, it’s also the second largest global retailer, based on worldwide sales of $116 billion. But with a market cap of just $72 billion, it lags far behind higher-profile retailers like Amazon (market cap of $364 billion) and Walmart (market cap of $220 billion) in investors’ perception of value—and that spells opportunity.

Plus, Costco has growth potential, not on the scale of Amazon, but substantial potential nevertheless.

Today, the company operates 723 warehouse stores, with 506 of those in the U.S., 94 in Canada, and the remaining 123 spread among Mexico, the U.K., Japan, Korea, Taiwan, Australia and New Zealand.

In 2017, the company expects to open 31 new warehouse stores, including 17 in the U.S. and seven in Canada and the first stores in France and Iceland.

In the fiscal first quarter of 2017, which ended October 29, Costco reported revenues of $27.5 billion, up 3% from the year before and earnings of $1.24 per share, up 14% from the year before.

Both numbers were slightly below analysts’ estimates. But the stock gapped higher in response!

And as I’ve told you many times, the action of the stock is paramount.

So, while the common wisdom is that Costco is lagging on the e-commerce front (true), the fact is that e-commerce is not the only game in town—as we saw recently when Amazon opened up its own brick and mortar, self-service stores.

Costco has certainly explored the idea of competing with Amazon in the online shopping arena, but concluded that its strength is serving the penny-pinching American family that wants to fill the SUV with groceries at bargain prices—and fill up the SUV at the gas pump, too.

And then there are the dividends (which Amazon doesn’t pay). Costco began paying dividends in 2004, and today, the stock yields 1.1%. Plus, the dividend is growing at a healthy rate of 13% per year.

So, you could buy COST here, hoping that the current uptrend will be the one that breaks out above resistance at 170.

Or, you could look for the next Costco.

You see, COST was originally recommended more than two years ago in Cabot Dividend Investor, when the stock was even more out of favor than now. But investors who followed our advice are now sitting on profits of 48%—and enjoying a yield on cost of 1.6%. Also, officially, Cabot Dividend Investor now has COST rated HOLD.

So what you really want is the next Costco—the next best retail stock.

For details on how you can get it in Cabot Dividend Investor, along with comprehensive advice on building your own dividend stock portfolio, click here, because you deserve a portfolio of healthy dividend growers in 2017.

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A Stock That’s Benefiting From Low Oil Prices

By Chloe Lutts Jensen, Chief Analyst, Cabot Dividend Investor

From Cabot Wealth Advisory 4/3/15 Sign up for Cabot Wealth Advisory—it’s free!

Costco (COST) is one of our best-performing positions recently and a major beneficiary of low oil prices. The company’s store-adjacent gas stations become more profitable when oil prices drop, and their value proposition does well in times of moderate economic growth. We’ve owned Costco since February 2014, giving us a 68% total return to date. Here’s what I wrote about Costco in my latest Dividend Investor issue:

“Costco reported excellent second-quarter earnings this month, including 26% earnings growth. EPS of $1.35 soundly beat analysts’ expectations of $1.18, although revenue of $27.45 billion fell slightly short of the consensus $27.65 billion prediction. Same-store sales rose 4% in the U.S. and 2% overall. Costco also announced that Visa and Citigroup will replace AmEx as its exclusive credit card partner. Costco is a Buy for dividend growth.”

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