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.

Key Takeaways

  • Costco reports fourth quarter earnings after the close on Thursday.
  • The stock sold off after reporting better-than-expected fourth quarter sales metrics earlier this month.
  • Accumulation has failed to match strong price action, setting off a bearish divergence.

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.

A price target is an analyst's projection of a security's future price. Price targets can pertain to all types of securities, from complex investment products to stocks and bonds. When setting a stock's price target, an analyst is trying to determine what the stock is worth and where the price will be in 12 or 18 months. 

Costco Long-Term Chart (2011 – 2020)

Long-term chart showing the share price performance of Costco Wholesale Corporation (COST)

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)

Short-term chart showing the share price performance of Costco Wholesale Corporation (COST)

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.

A symmetrical triangle is a chart pattern characterized by two converging trendlines connecting a series of sequential peaks and troughs. These trendlines should be converging at a roughly equal slope. Trendlines that are converging at unequal slopes are referred to as a rising wedge, falling wedge, ascending triangle, or descending triangle.

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.

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