Costco (COST) on the Defensive Despite Strong Sales

Costco Wholesale Corporation (COST) reports fourth quarter 2020 earnings after Thursday's closing bell, with analysts expecting a profit of $2.80 per share on revenue of $52.1 billion. The stock ran in place after reporting in-line third quarter results in May and resumed its upward trajectory in June, lifting into a series of all-time highs. It has been pulling back since the start of September and has now given up about 10% of its value.

The company has benefited from the COVID-19 pandemic, staying open with other big box retailers while smaller operations were forced to close due to stay-at-home and quarantine orders. A robust e-commerce portal has underpinned profits during this period, capturing market share from an older demographic used to brick-and-mortar transactions. Even so, closures in profitable optical, hearing aid, photo, and food court departments have taken their toll on revenues.

Shareholders are confident that Costco will post a strong earnings report after a Sept. 2 release confirmed that fourth quarter net sales of $52.3 billion beat $51.01 billion expectations, with both numbers marking healthy increases over the fourth quarter of 2019. Total sales increased 14.1%, while e-commerce sales rose an astounding 91.3%. However, the stock rolled over after the news, indicating that shares may be fully valued at this time.

Wall Street views Costco as a "Moderate Buy" based upon 17 "Buy" and 7 "Hold" recommendations. No analysts are recommending that shareholders sell their positions at this time. Price targets currently range from a low of $302 to a Street-high $410, while the stock opened Monday's session about $32 below the median $365 target. This placement conflicts with recently aggressive selling pressure, possibly indicating that the targets are too high.

Costco Long-Term Chart (2011 – 2020)

Costco bounced back to the 2008 high at $75.23 in 2011 and broke out, entering a channeled advance that continued into the February 2015 high at $156.65. The uptrend then eased into a shallower trajectory and continued to post new highs into a 2018 channel breakout that escalated once again in the second half of 2019. The rally topped out at $325 in February 2020, giving way to a pandemic swoon that posted a seven-month low in March.

Costco Short-Term Chart (2018 – 2020)

Price action eased into a symmetrical triangle pattern after the low, breaking out once again in July. The uptick posted an all-time high at $363.67 in early September and reversed into a pullback that has now pierced the 50-day exponential moving average (EMA) for the first time since June. Given price action earlier this year, testing at this key level probably isn't over yet, raising the odds for a quick flush followed by a sizable recovery wave.

The on-balance volume (OBV) accumulation-distribution indicator is telling a bearish tale, posting an all-time high in March and dropping to a 52-week low in the second quarter. Buying pressure since that time has failed to reach the prior high, setting off a major bearish divergence that could eventually end the powerful uptrend. However, shareholders can hang tough as long as the stock holds above the first quarter peak.

The Bottom Line

Costco reports earnings this week following a double-digit share price decline that unfolded despite better-than-expected fourth quarter sales metrics.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.