Costco (COST)..Even a bear finds something to buy on a dipThis is a follow up to my recently written note on COST.
The company reports earnings tonight after the close.
The November same-store-sales data released on 12/1/22 rattled markets when it came in below expectations and reinforced those who feared that COST's strong sales throughout '22 were driven largely by the cheaper gasoline available at COST stores. They opined that cheaper gas attracted shoppers and now that gasoline prices have come off their highs, the reduction in traffic on the gas lines would result in fewer people buying at the stores.
Reasonable concern.
Add to that the product mix of consumers, stepping back from higher-margin technology and clothing items, and instead, spending money on lower-margin necessities such as food and other staples, a fate well known to other big-box retailers such as Target (TGT) and Walmart (WMT).
Collectively, enough evidence of a change in fortunes to warrant, or at least put into question, the seemingly rich P/E it's maintained all year of close to 40 +/-, well above its five year average p/e of 36, and meaningfully above most of its competitors other than WMT who has hovered in the mid 40s!
That rich valuation has been justified by lovers of the stock since COST has maintained an exalted status of being among the few seemingly 'recession proof' stocks out there. In hard times, people will continue to look for 'value' especially in non-discretionary purchases that must be made.
The recent selloff ahead of tonight's earnings appears to be pricing in the nasty November sales miss plus anticipated more of the same.
While my previous posts have highlighted my overall bearishness on the equity markets, COST is among the few names that I've been buying on dips, today's included. I think the value proposition is exactly that: value! Heading into what I believe will be increasingly difficult times for more and more Americans, all levels of income and wealth (well, almost all) are likely to step down a notch in terms of how much they spend, on what it is that they spend, and where they actually spend. COST ought to be a beneficiary of more shoppers as times get tougher.
On their supply side too, there's reason to like COST. Being the behemoth that they are, their ability (and willingness) to pressure suppliers to keep prices down and to make them absorb more of the margin squeeze ignited by inflation is quite strong.
Finally, on word on the chart. COST Is testing the lower bound of a flag pattern driven my momentum (MACD) that has rolled over hard, enough to put RSI close to oversold. The degree to which the lower bound holds as support...or not...will determine the pace of my interest in further accumulation.
We'll know more tonight after the bell.
But even on a disappointment and a subsequent fall in the stock price, unless there's some drastic change in the overall story, I believe COST is well positioned to withstand the upcoming likely economic rout better than most.
Again, this is NOT advice!! It is merely food for thought and discussion.
Comments welcome.
