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Michael Fowlkes' Analyst Insights

Options and ETF Analyst Writer
Michael Fowlkes
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May 23, 2016 - Costco to Report Fiscal Q3 Numbers May 25

What's Happening

Retailer Costco (COST) is scheduled to report its fiscal third-quarter results before the market opens on May 25. Analysts forecast the company to post earnings of $1.22 per share, up from $1.17 during the same period last year. The stock has been trending lower, with shares down 11.6% on the year.

Technical Analysis

COST was recently trading at $142.70, down $27.03 from its 12-month high and $25.67 above its 12-month low. Technical indicators for COST are bearish and the stock is in a weak downward trend. The stock has recent support above $138.60 and recent resistance below $150.00. Of the 18 analysts who cover the stock, 10 rate it a “strong buy”, two rate it a “buy”, and six rate it a “hold”. The stock receives S&P Capital IQ™s 3 STARS “Hold” ranking.

Analyst's Thoughts

The outlook for Costco’s earnings report is a bit unclear. So far we have seen signs of both strength and weakness in the sector, so Costco could easily go either way. Target (TGT) disappointed the market and the stock endured a major post-earnings sell off, while mega-retailer Wal-Mart (WMT) showed strength and made a big move to the upside. The two reports indicate that consumers are spending, but they are being a bit selective on where they shop. The irony of the Target report was that earnings were actually better than expected, but revenues were a little lighter than expected and its current quarter guidance really drove the stock lower. Despite the weak Target guidance, I still like Costco. The niche has been doing well, and consumers are still interested in finding deals, which they can easily find at Costco if they are willing to pay the annual membership and buy in bulk. The “Amazon effect” has hit Target, but Costco is fairly immune to Amazon simply because of its bulk-buying business model. While it is easy to buy electronics or toys on Amazon, consumers are not as likely to go to the site to purchase bulk toilet paper or food. COST has been trending lower, but with the recent pullback in the stock, the P/E has fallen to a reasonable 27.3. Analysts forecast earnings to grow by just 1.3% this year as the company continues to deal with the aftermath of its ending relationship with American Express (AXP), but next year analysts see earnings rising 13.3%, so the stock still has a lot of upside potential.

Stock Only Trade

If you're looking to establish a long stock position in COST, consider buying the stock under $142.75. Sell if it falls below $128.50 or take profits if it gets to $164.00.

Bullish Trade

If you want to set up a bullish hedged trade on COST, consider a June 125/130 bull-put credit spread for a 25-cent credit. That's a potential 5.3% return (68.6% annualized*) and the stock would have to fall 8.7% to cause a problem.

Bearish Trade

If you would prefer to take a bearish stance on COST at this time, consider a June 155/160 bear-call credit spread for a $0.25 credit. That's a potential 5.3% return (68/6% annualized*) and the stock would have to rise 8.8% to cause a problem.

Covered Call Trade

If you are upbeat on the stock, but would prefer to build in some protection in the event of an earnings miss, consider a July $145 covered call. Buy COST shares (typically 100 shares, scale as appropriate), while selling the July $145.00 call for a debit of $139.60 per share. The trade has a target assigned return of 3.9%, and a target annualized return of 25.7% (for comparison purposes only).

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