(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Costco Wholesale Corp. (COST) shares may be heading lower by about 11% over the near term, based on an analysis of the technical chart. Shares of the stock have outperformed the broader S&P 500 so far in 2018 rising by nearly 6%, versus the S&P 500's rise of about 2%. But analysts are forecasting Costco’s earnings growth to slow materially in coming years, leaving shares expensive at the present valuation. 

The company is set to report fiscal third-quarter results on May 31 after the close of trading. Analysts are looking for the company to show that revenue grew by 10% to $31.75 billion, while earnings are forecast to climb by 19% to $1.67 per share.

COST Chart

COST data by YCharts

Technical Resistance

The technical setup in the chart shows a well-defined trading range for the stock over the last number of years. Shares are presently trading at the upper end of the channel, and should they fall to the lower end, it could result in a decline of about 11.5% to $174. The stock price has stalled over the past month and has been unable to climb above resistance around $200. (For more, see also: Costco Traders Are Bullish Ahead of Earnings.)

Relative Strength Weakening

Additionally, the relative strength index (RSI) has been trending lower more recently after hitting overbought levels over 80. A level over 70 is overbought. Furthermore, the RSI has been trending lower while the stock has been bouncing since the beginning of February. The divergence in the direction between the RSI and the stock price is a bearish sign. Volume levels have also been declining in the stock, and that may suggest buying interest may be fading. 

Not Cheap

Analysts currently see revenue for the full year rising by 8% versus a year ago, to $139.54 billion. While earnings are seen climbing by 17.5% to $6.84 per share. But the earnings growth for Costco is seen decelerating over the next two years, to a growth rate of 12.6% in 2019 to 7.6% in the year 2020. It leaves shares of Costco trading at roughly 25.5 times 2019 earnings estimates—not cheap for a company with slowing growth. Additionally, Costco’s earnings multiple is currently in the middle of its historical range, of 22 to 28, making it at best reasonably valued. (For more, see also: How Costco's Stock Can Soar on E-Commerce.)

Fundamental Chart Chart

Costco's bearish technical chart and expensive stock do not bode well for the future over the short term. It will be the quarterly results at the end of May that will have a more significant impact on where the stock goes over the longer term. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.