Costco Wholesale Corporation (NASDAQ:COST) reported earnings last night and investors are selling the stock on the headline. This is not happening because of bad results — in fact, management beat on all metrics and crushed the comparable sales expectations. They delivered an astonishing 10% increase in comparable sales which is 40% better than expected.
But the story is the same. Short-term traders want to see over-zealousness on forward guidance.
We are amidst global tariff war threats so caution is de rigueur.
There were challenges.
COST did suffer from margin pressures from competition and transient higher energy costs.
But these are operational conditions that their competent management will successfully tackle in coming quarters.
I learned long ago not to bet against proven winners, and Costco certainly qualifies as one. Selling it on this strong report is a mistake long-term, and therein lies the opportunity.
COST stock, though not a screaming bargain at a 26 forward price-to-earnings ratio, it’s not bloated either. It is a premier retail company which has successfully battled and thrived even in the face of the Amazon.com, Inc. (NASDAQ:AMZN) assault where most other retailers failed.
Coming into the earnings, Costco stock was up 5% year-to-date which is much smaller than Amazon’s 37% rally, but it’s much better than, say, Walmart Inc (NYSE:WMT). My long-term thesis for these three retailers is positive. I believe there is enough room for all three to prosper for years to come.
Each of them has strengths that should be able to carry outperformance through 2018 and beyond. In Costco’s case, I find myself at the store every week even though I use Amazon and Walmart just as often.
Markets in general are near or at all-time highs, so although I want to go long Costco stock and catch the proverbial falling knife, I don’t want to put my money at risk without any room for error. So I use options to open a bullish trade. This way I can leave plenty of room for error between current price and my risk levels.
Fundamentally I am confident that if I own COST stock at a much lower price than now, I will profit from it in the long term. This is important to my methods of options trading. I don’t even need a rally to profit. I merely need the stock to hold above proven support levels.
Technically, there is risk. There could be downside pressure to $192, then to $188 per share. Although these are not forecasts, they are scenarios of which I need to be aware. Last December, bulls emphatically spiked the stock from the $176 per share neckline and have since used it as support on several occasions. I expect it to hold through 2018.
Most analysts are split between buy and hold ratings but all agree that it has more room to run. COST stock is trading well below their average price targets.
COST Stock Trade Idea
The Trade: Sell the COST July $175 naked put for 90 cents to open. This is a bullish trade where I have a 90% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $174.10.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the COST July $175/$170 credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 10% if successful.
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Source: Investor Place