Costco Wholesale Corporation (COST) has fallen nearly 10% since Amazon.com, Inc. (AMZN) announced its all-cash offer for Whole Foods Market, Inc. (WFM). Investors worry that the Amazon's fondness of razor-thin margins could have a negative impact on warehouse retailers that target cost-conscious consumers. In fact, Deutsche Bank recently downgraded Costco stock to Hold and cut its price target to $172.00, citing the threat to Costco's grocery moat.
Despite the bearish sentiment, Amazon.com has not announced any specific plans for its Whole Foods acquisition, which means that the threat may not be imminent. UBS analysts further noted that Costco's "limited assortment, low cost structure, and deep private label penetration" could help preserve its value for the foreseeable future. Retailers like Target Corporation (TGT) that share Amazon's affluent customer base could be more at risk. (See also: 3 Reasons Costco Has Membership Fees.)
From a technical standpoint, Costco stock broke down from trendline support to below its lower trendline and S2 support at $165.24. The relative strength index (RSI) quickly fell to oversold levels at 27.79, but the moving average convergence divergence (MACD) experienced a rapid bearish crossover. Traders should watch for a rebound back into the prior price channel or a move lower to the 200-day moving average at $157.11. (For more, see: Costco Unfazed by Tough Retail Scenario, Posts Solid Comps.)
The extreme move lower could be seen as an overreaction to the Amazon news given the uncertainty surrounding the deal and its potential. But in the short term, it is likely that technical factors will continue to drive the price until more details emerge. The market has learned not to underestimate the power of Amazon – and other tech companies – at entering new markets and quickly changing how conventional businesses are run. (See also: For Whole Foods Workers, Fears of Robots, Drones and Culture Clash.)
Charts courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.