$COST: Strategy, Patterns, and ProjectionsNASDAQ:COST is a core position for me. It's a fundamentally strong company:
• The company has a favorable track record of earnings beats, including yesterday's call.
• It has a 15% five-year average return on capital.
• There has been a consistent five-year trend of growth in both revenue and earnings.
• The earnings have been consistently favorable.
• Over the past five years, they have been reducing their debt.
• Their free cash flow is good, but the ratio of FCF to enterprise value is a little lower than I would like. Additionally, the FCF has been somewhat inconsistent over the past five years.
• The five-year average dividend growth is 12%, with 18 consecutive years of dividend increases.
Over the past year, I have been accumulating within this pattern. Although I am not typically a pattern trader, this is a company that I follow closely and the pattern is fairly clear. Triangles are strong trading patterns that reach targets 67% of the time. However, they typically work best with small caps and in rising markets. The price can break in either direction. Projections are placed at the breakout area and are based on the vertical distance between the initial reversal points in the triangle. If the price breaks lower, it could fill the gap in volume between $390-450. $390 is a firm area of support. If it breaks high, a retest of the prior all-time high at $610 is a reasonable target, with the next likely overhead resistance at $650.
I'm unclear whether the movement in late April was a breakout followed by a throwback to the cradle, or whether the symmetry of the movement is still within the pattern. I plan to make an entry now and another entry upon confirmation of a breakout higher. If the move fails and breaks lower, my stop will be at $440 with re-accumulation closer to $400.
