Stock Spotlight | Hitting new highs! How to interpret Costco's recent price movement

Moomoo Learn wrote a column · Sep 29 21:51

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$Costco (COST.US)$, the largest membership-only warehouse club in the U.S., has shown remarkable stock performance (+240% within 5 yrs), rivaling even tech stocks.

Since August, Costco's stock price has hit new all-time highs. Why is this happening? Is it still a good time to consider Costco?

Moomoo Learn's "Stock Spotlight" column delves into Costco's recent performance to provide some insights.

This is for information and illustration purposes only. Past performance is not indicative of future

This is for information and illustration purposes only. Past performance is not indicative of future performance. It should not be relied on as advise or recommendation.

What factors are driving the surge?

We have identified the potential catalysts behind the recent stock price increase:

1. Market optimism about Costco's Q4 earnings for fiscal year 2024.

2. Concerns about a potential U.S. economic downturn, making Costco's recession-resistant qualities attractive to investors.

3. Federal Reserve interest rate cuts, which could boost the company’s valuation.

Technical analysis is a valuable tool for understanding stock trends. Today, we'll use two methods to analyze Costco's market performance.

Technical analysis: stock price in the latter stage of its uptrend

Costco's stock began a new breakout rally in November 2023. Currently, the stock is still within its upward channel, showing strong momentum.

However, this recent surge marks the third rally in this cycle, suggesting the trend might be entering its later stages.

For more on channel trading strategies, check out our Premium Courses.

Stock Spotlight | Hitting new highs! How to interpret Costco's recent price movement

This is for information and illustration purposes only. Past performance is not indicative of future performance. It should not be relied on as advise or recommendation.

Since September, the upward momentum has slowed, possibly because the market is awaiting Q4 earnings.

However, the stock price remained between the middle and upper lines of the Bollinger Bands, indicating that market expectations were still relatively optimistic.

For more on channel trading strategies, check out this course: How to Gauge Trends with Bollinger Bands

This is for information and illustration purposes only. Past performance is not indicative of future performance. It should not be relied on as advise or recommendation.

On September 26, Costco released its Q4 earnings report. Although the EPS growth was a pleasant surprise, revenue growth fell slightly short of market expectations, making it a neutral report overall.

Technical analysis shows that the stock price has already factored in these results, suggesting that the stock may lack upward momentum in the near term.

Valuation: Comparable to Nvidia

What about long-term investment? Is the current price still attractive?

To answer this, we need to look at the company's valuation. In this analysis, we'll use the Price-to-Earnings (P/E) ratio as a key indicator.

If you're not familiar with P/E valuation, you can refer to this course:Four Common Methods for Valuing a Stock

On moomoo, you can see that Costco's current P/E ratio is around 56. This not only exceeds the industry average of 39.33 but also strays further from its historical average.

Source: moomoo. This is for information and illustration purposes only. Past performance is not indicative of future performance. It should not be relied on as advise or recommendation.

Costco's valuation is now similar to Nvidia's, yet its growth potential is significantly lower. Does this mean Costco's stock is severely overvalued and should be sold or even shorted immediately?

Let's not rush to conclusions. In 2020, Warren Buffett sold all his Costco shares because he thought they were overvalued (with a P/E ratio of about 40 at the time), but he ended up missing out on nearly 200% gains afterward.

So, What’s the market logic behind the stock price growth?

Costco's "fixed-asset-like" features

Quite possibly, the market prices Costco differently than typical stocks. The company's business strengths might give it attributes similar to fixed-income assets:

– Costco enjoys stable demand in the retail industry and resilience to economic cycles.

– More importantly, Costco's excellent business model and outstanding operational management give investors strong confidence in its long-term stability.

How can we prove this? Here are two key points:

– Costco's global membership renewal rate is an impressive 90.5% and has been steadily rising. This indicates a highly loyal customer base and strong brand power.

– Costco's total asset turnover ratio is a remarkable 3.77 (Walmart's is 2.61). This is a major reason for its high ROE of 31.64% (Walmart's is 18.97%), despite a low operating margin of 3.56%.

Source: moomoo. This is for information and illustration purposes only. Past performance is not indicative of future performance. It should not be relied on as advise or recommendation.

Many low-risk investors buy and hold Costco stock despite its high valuations, as they are comfortable with the trade-off of 'low risk, low returns.'

Possible strategies

– A moderate Q4 report may not sustain further increases in the short-term.

– For long-term investors, a covered call strategy can potentially enhance returns, by selling call options to earn premiums.

For insights on the covered call strategy, refer to this tutorial: Covered Call; for more details on trading options, check out this video: How to Trade Options.

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Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more