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After a rocky start to the year, Costco (NASDAQ:COST) stock is likely to recover its footing. The stock is under pressure but through no fault of its own.
Source: Helen89 / Shutterstock.comWhen Amazon (NASDAQ:AMZN) came on to the scene, online retail was not even a thing. It took it 10 years to convince the world that it was doing things right. Except for a few retailers, the industry turned upside down on itself. The lockdowns made it abundantly clear that we owe Jeff Bezos a gift basket. The brick-and-mortar stores that thrived were not so traditional, like Walmart (NYSE:WMT) and Costco.
This is my roundabout way of giving kudos to the management teams. So it is not a surprise to see COST stock also break records.
COST Stock Is a Star
Although you can’t really tell that from the recent price action, COST has been a star stock. Amazon may have changed the face of retail, but Costco also etched its story in history. For a while people joked about the portion sizes, but now hoarding is a way of life.
Costco also adapted well to the shift to online without losing touch with the people. This is a bold statement since it relies heavily on foot traffic.
The stock has backup from the company’s financial metrics. They grew sales at a respectably rapid pace especially through the pandemic. Revenues last year were $200 billion, which is almost double from 2015.
They are also doing a fine job controlling costs, because they delivered $5.2 billion in net income.
Statistically, COST stock carries a high price-to-earnings ratio of 42. However, investors get what they pay for since the stock is still 21% above last Summer’s breakout.
Correction Is an Opportunity
Source: Charts by TradingViewThe opportunity today comes from the recent correction. If markets stabilize, I bet that it would have more upside from here.
Costco stock is now 20% below its highs, but that was part of normal price action. When stocks break out into large rallies, it would be normal to revisit the necklines. That’s how they can establish better footing for more upside. The process consolidates so that the new batch of investors would have better conviction and be less edgy.
Fundamentally there’s absolutely nothing wrong with the company. So, I can safely assume that this wound in COST stock is superficial.
Moreover, markets in general are also correcting harder than they have in a long time. It is likely that most of the downside pressure is in fact extrinsic.
The rally out of the pandemic was too strong, and this swoon is the flip side of it. From low-to-high Costco stock rallied 87% from the 2020 lows. So far this year they haven’t even given back half of it.
Therefore, it is important to pay attention to what the markets overall are doing. Any downside in the indices will likely cause COST to lose even more altitude. Today there is a bit of risk from the Fed statement on monetary policy tightening.
Management will report earnings within 45 days, and for now investors will have to go with the flow. The $470 per share area was a pivotal zone since September, so I expect buyers are lurking below it. If that fails, there are even stronger ones waiting within the next 10% below that.
If the indices recover this week and next, so will COST.
I don’t make it a habit to seek confirmation from Wall Street experts. But, according to Yahoo finance the analysts average price target is $558 per share. If you believe them, owning COST stock is a viable bullish thesis.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
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