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Costco Is a Strong Company, but Stock Looks Overbought

Published 04/09/2019, 02:22 PM
Updated 04/09/2019, 03:15 PM
© Reuters.

By Charley Blaine

Investing.com - Numbers suggest Costco Wholesale (NASDAQ:COST) stock is overbought.

Even with Tuesday's 0.8% dip, the stock is selling at 32x trailing 12-month earnings.

The technical indicators on Investing.com rate the stock a sell. The consensus one-year target price for the stock is $241.35 and that's lower than the current price.

Of 30 analysts tracked by Investing.com, 18 rate the stock a buy and the rest are neutral.

And it has had a terrific run-up since the Christmas slump, rising 30% from its Dec. 26 low to a 52-week high of $247.09 on Monday.

All that said, Costco has a long record of growing its business ($142 billion in revenue in fiscal 2018), growing it profitably and growing it with a well-paid workforce who buy the stock and tend to stay at the company for a long time.

Costco, with its big warehouses filled with a somewhat limited selection, is nonetheless the world's largest seller of choice and prime beef, organic foods, rotisserie chickens and wine.

Its auto-buying program, where it matches buyers with local dealers who agree to limit their markups, resulted in 650,000 sales in 2018, up 25% from a year earlier. If Costco were an auto dealer, it would be one of the largest.

Prices are low in part because Costco has a built-in profit center in the annual membership fees it charges customers, who typically renew every year.

As of March, the Issaquah, Wash.-based company operated 770 warehouses in the United States, Canada, the United Kingdom, Australia, Mexico, Spain, France, Japan and South Korea.

And shareholders have done well, with a return of more than 14% a year - plus dividends - since the end of 2014.

When to get into Costco requires good timing because when Costco falls, it falls heavily. It dropped 42% in the turmoil in the year or so after the Sept. 11, 2001 terror attacks; 49% in 2008-2009, the heart of the financial crisis; and nearly 23% from its top in September to the post-Christmas bottom.

The last pullback was triggered in part because its first-quarter earnings and revenue missed Wall Street estimates. But the shares recovered nicely in March after its second-quarter earnings beat estimates. Some of the volatility may be due to the share ownership. Institutions own more than 73% of the stock.

Analysts polled by Investing.com expect $1.82 in earnings for the third quarter on revenue of $34.6 billion, compared with $1.70 a share and sales of $32.4 billion a year ago. Earnings are due May 31.

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