Wholesale membership retailer Costco (Nasdaq: COST) is scheduled to report fiscal fourth quarter and year-end earnings on October 3. From a technical perspective the stock has been performing really well since the December low. From a fundamental perspective, the company has some indicators that are sub-par and could hurt the stock going forward.
Let’s look at the chart first. We see the upward trend over the last nine months and we see how a pretty clearly defined trend channel has formed in the last seven months. The stock is just above the lower rail at this time and the lower rail is in close proximity to the 50-day moving average. The stock used the 50-day as support back in August and could do so again.
The daily stochastic readings are in oversold territory and have been for a few days now, but the indicators made a bullish crossover on September 25. If you look back over the last nine months, this is only the second time the indicators have been in oversold territory since December.
The Tickeron Price Growth Rating for Costco is 18 and that indicates outstanding price growth. The stock price has grown at a higher rate over the last 12 months compared to S&P 500 index constituents. A rating of 1 points to highest price growth (largest percent return) while a rating of 100 points to lowest price growth (smallest percent return).
The Relative Strength Rating from Investor’s Business Daily is a 90 and that means Costco’s stock price has performed better than 90% of the stocks in IBD’s database.
Turning our attention to the fundamental outlook we see some indicators that are well above average and others that are below average. Costco’s earnings growth has been decent with an average rate of 15% per year over the last three years. Earnings grew by 11% in the third quarter and they are expected to grow by 18% for the year as a whole.
Another indicator that is above average is the return on equity which is at 25.6%. Unfortunately the company’s profit margin is below average at 3.1% and the sales growth is below average as well. Over the last three years sales have grown at a rate of 9% and they were up by 7% in the third quarter.
If we combine the sales growth, the profit margin, and the return on equity, we get the SMR rating from Tickeron. That indicator for Costco is 76. This indicates weak sales and an unprofitable business model. The SMR rating is based on comparative analysis of weighted Sales, Income Margin and Return on Equity values compared against S&P 500 index constituents.
From a valuation standpoint, Costco seems to be priced relatively well at this time. The Tickeron Valuation Rating is at 9 and that indicates that the company is seriously undervalued in the industry. A rating of 1 points to the most undervalued stocks, while a rating of 100 points to the most overvalued stocks. This rating compares market capitalization estimated by our proprietary formula with the current market capitalization.
Looking at the sentiment indicators for Costco we see that analysts are a little more pessimistic toward the stock than the average company. There are 27 analysts covering the stock at this time with 16 “buy” ratings, nine “hold” ratings, and two “sell” ratings. This puts the buy percentage at 59.3% and that is slightly below the 65% to 75% average range.
The short interest ratio is slightly below average at 1.73. This is the lowest reading for the ratio over the past year and that indicates that short sellers are becoming more optimistic toward Costco.
If we look at all three analysis categories—fundamental, sentiment, and technical—we see that the fundamentals and the sentiment are mixed while the technical indicators are pretty strong. This could be an interesting earnings report for investors.