Getting Paid to Wait for a Better Entry Price on Costco
Discount retailer Costco (COST) rallied nicely since hitting a low of $262.68 in late February. The stock hit a recent high of $388.07 and has been consolidating over the last few weeks. The rally from June through October put the stock in overbought territory based on both the 10-week RSI and the weekly stochastic indicators.
While I wouldn’t mind owning Costco, I think it is more prudent for investors to wait for a better entry point.
Something that jumped out at me is the trend channel that has formed over the last two years and how the stock is bumping up against the upper rail of the channel at this time.
With the stock hitting the upper rail of the channel and being in overbought territory, some investors might consider shorting Costco. Personally I wouldn’t recommend that because the company’s fundamentals are too good for me to consider a bearish position. Plus the stock could consolidate for a few months. A consolidation would move the stock out of overbought territory and if it last long enough it would give the lower rail time to catch up and provide support.
If we look at Tickeron’s Fundamental Screener, Costco gets a great score in the Profit vs. Risk Rating, a good score in the Price Growth Rating, and average scores in the SMR and P/E Growth ratings. The company does get three negative scores as well, but if we look at those areas, they are based on the timing and the stock price. The Outlook Rating is poor, and so is the Valuation Rating. The company also gets a negative mark for its Seasonality Score.
Another way to play the current setup on Costco would be to sell out of the money puts. Like I said, I would like to own the stock, but not at the current price. Because of the fundamentals, I don’t like the risk/reward relationship of shorting the stock. If the stock does fall down to the $330 area, it would mean a drop of 11.9% and a gain of that much on a short sell. However, if the stock continues to rise and hug that upper rail, the short position starts losing money.
If we look at the March ’21 330-strike puts, they are selling at $4.30 right now, or $430 for each contract. To sell the puts, investors would have to put up $3,730 in margin. If the stock drops below $330 and the stock gets put to you, your cost basis for owning Costco is $325.70. That’s down near the lower rail and where you want to enter a new position on Costco in my estimation.
If Costco continues higher or only drops a little, you keep the $430 and you earn a return on margin of 11.5%, a similar return as the short sell, but with less risk.
I like the idea of making money while waiting for a better entry price, especially on a stock that looks as strong as Costco.
Here’s what the complete outlook from Tickeron looks like.
COST in +0.45% Uptrend, rising for three consecutive days on December 16, 2024
Moving higher for three straight days is viewed as a bullish sign. Keep an eye on this stock for future growth. Considering data from situations where COST advanced for three days, in of 377 cases, the price rose further within the following month. The odds of a continued upward trend are .
Technical Analysis (Indicators)
Bullish Trend Analysis
The Stochastic Oscillator shows that the ticker has stayed in the oversold zone for 3 days. The price of this ticker is presumed to bounce back soon, since the longer the ticker stays in the oversold zone, the more promptly an upward trend is expected.
COST may jump back above the lower band and head toward the middle band. Traders may consider buying the stock or exploring call options.
The Aroon Indicator entered an Uptrend today. In of 423 cases where COST Aroon's Indicator entered an Uptrend, the price rose further within the following month. The odds of a continued Uptrend are .
Bearish Trend Analysis
The 10-day RSI Indicator for COST moved out of overbought territory on December 12, 2024. This could be a bearish sign for the stock. Traders may want to consider selling the stock or buying put options. Tickeron's A.I.dvisor looked at 60 similar instances where the indicator moved out of overbought territory. In of the 60 cases, the stock moved lower in the following days. This puts the odds of a move lower at .
The Momentum Indicator moved below the 0 level on December 17, 2024. You may want to consider selling the stock, shorting the stock, or exploring put options on COST as a result. In of 84 cases where the Momentum Indicator fell below 0, the stock fell further within the subsequent month. The odds of a continued downward trend are .
The Moving Average Convergence Divergence Histogram (MACD) for COST turned negative on December 13, 2024. This could be a sign that the stock is set to turn lower in the coming weeks. Traders may want to sell the stock or buy put options. Tickeron's A.I.dvisor looked at 43 similar instances when the indicator turned negative. In of the 43 cases the stock turned lower in the days that followed. This puts the odds of success at .
Following a 3-day decline, the stock is projected to fall further. Considering past instances where COST declined for three days, the price rose further in of 62 cases within the following month. The odds of a continued downward trend are .
The Tickeron Profit vs. Risk Rating rating for this company is (best 1 - 100 worst), indicating low risk on high returns. The average Profit vs. Risk Rating rating for the industry is 59, placing this stock better than average.
The Tickeron SMR rating for this company is (best 1 - 100 worst), indicating very strong sales and a profitable business model. SMR (Sales, Margin, Return on Equity) rating is based on comparative analysis of weighted Sales, Income Margin and Return on Equity values compared against S&P 500 index constituents. The weighted SMR value is a proprietary formula developed by Tickeron and represents an overall profitability measure for a stock.
The Tickeron PE Growth Rating for this company is (best 1 - 100 worst), pointing to consistent earnings growth. The PE Growth rating is based on a comparative analysis of stock PE ratio increase over the last 12 months compared against S&P 500 index constituents.
The Tickeron Price Growth Rating for this company is (best 1 - 100 worst), indicating steady price growth. COST’s price grows at a higher rate over the last 12 months as compared to S&P 500 index constituents.
The Tickeron Valuation Rating of (best 1 - 100 worst) indicates that the company is significantly overvalued in the industry. This rating compares market capitalization estimated by our proprietary formula with the current market capitalization. This rating is based on the following metrics, as compared to industry averages: COST's P/B Ratio (17.422) is slightly higher than the industry average of (8.013). P/E Ratio (56.335) is within average values for comparable stocks, (41.455). COST's Projected Growth (PEG Ratio) (5.850) is slightly higher than the industry average of (2.817). COST has a moderately low Dividend Yield (0.005) as compared to the industry average of (0.022). P/S Ratio (1.648) is also within normal values, averaging (1.306).
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a company which sells goods through membership warehouses
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