“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, June 25, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy


"Trading Capital Management"

Option Trade – Costco Wholesale Corporation (NASDAQ:COST) CALLS

Wednesday, June 27, 2018

** OPTION TRADE: Buy the COST AUG 17 2018 220.000 CALL at approximately $1.60 TO $1.80. Place a pre-determined sell at $3.20.

Also include a protective stop loss of $0.65.

Costco Wholesale Corporation (NASDAQ:COST), with its subsidiaries is engaged in the operation of membership warehouses in the United States and Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Australia, and through majority owned subsidiaries in Taiwan and Korea, has been adjusting its business to offer convenience and value as the threat of Amazon (AMZN) continues. Despite the heightened competition, Costco has managed to defend its market share and report improved comps.

Costco has stuck to its value game, which is working in its favor. The significant decline in the effective tax rate is also supporting the companies’ growth measures and cushioning its earnings.

Costco is focusing on lowering costs and driving efficiency, which should support its margins.

Costco share price movement reveals that it has increased roughly 13.1% in the past six months comfortably outperforming the industry’s growth of 10.7% and S&P 500's advance of approximately 3%. Further, the stock is hovering close to its 52-week high of $211.77.

The company saw net sales rise in the third quarter by more than 12%, consistent with its recent performance. In addition, the retailer saw same-store sales jump by 9.7% (7.7% when you exclude gas) in Q3 in its U.S. stores; earnings per share (EPS) came in at $1.70, up from $1.59 in the same period in 2017.

Digital sales continue to be a source of strength as well: They climbed 37% in Q3 and have risen by 36% so far this fiscal year. That's impressive because they followed similar gains in both periods during the previous year.

Influencing Factors

Costco continues to be one of the dominant retail wholesalers based on the breadth and quality of merchandise offered. In fact, the company's strategy to sell products at heavily discounted prices has helped it to remain on growth track. Certainly, a favorable economic backdrop - strong labor market, rising disposable income and elevated consumer sentiment - are also working in tandem for the company.

It is also gradually expanding e-commerce capabilities in the United States, Canada, the U.K., Mexico, Korea and Taiwan. To drive its online sales further, the company launched new delivery services for its customers, one CostcoGrocery option to deliver non-perishable items to buyer's home within two days of ordering and another same day grocery delivery service in collaboration with Instacart.

Additionally, a differentiated product range enables Costco to provide an upscale shopping experience for its members, consequently resulting in market share gains and higher sales per square foot. Also, membership fees have increased 14.4%, 12.6% and 9.8% in the third, second and first quarter of fiscal 2018.

Higher prices have not increased people dropping their memberships; in terms of membership fee renewal rates, U.S. and Canada member renewal rates at Q3 end came in at -- were 90.1%, similar to where they stood a quarter earlier at 90.1%. Worldwide rates improved ... to 87.5%, up from 87.3% 12 weeks ago at Q2 end.

Costco closed Q2 at 50.4 million total members; in Q3 it added 500,000 new ones to finish at 50.9 million. Total cardholders rose from 92.2 million at the close of Q2 to 93 million when Q3 finished.

Costco continues with positive comps performance driven by improved store traffic and average transaction size.

Comparable sales (comps) increased 11.7% in May, following an advance of 10.9% in April, 8.6% in March, 10.5% in February and 6% in January. As well, net sales have jumped 13.1%, 10.9%, 12.8% and 8.4% in the months of April, March, February and January, respectively.

Also, comparable e-commerce sales have surged 34.4%, 43.1% and 33.2% in May, April and March, respectively.

Analysts and Hedge Funds Opinions

Loop Capital set a $220.00 price objective on Costco in a report issued on Friday, June 1st. The firm currently has a buy rating on the retailer’s stock.

Costco had its target price boosted by analysts at Citigroup from $217.00 to $222.00 in a research note issued to investors on Friday, June 1st. The brokerage currently has a “buy” rating on the retailer’s stock. Citigroup’s target price would suggest a potential upside of 4.84% from the stock’s current price.

As well, Susquehanna Bancshares reissued their positive rating on shares of Costco in a research report sent to investors on Thursday, June 7th.

Several equities analysts have recently commented on the company…..

  • Royal Bank of Canada lifted their price target on shares of Costco Wholesale to $213.00 and gave the stock an outperform rating in a report on Tuesday, May 29th.
  • Telsey Advisory Group boosted their price objective on Costco Wholesale from $210.00 to $220.00 and gave the stock an “outperform” rating in a research note on Friday, June 1st.
  • Finally, Citigroup lifted their price target on shares of Costco Wholesale from $217.00 to $222.00 and gave the stock a buy rating in a report on Friday, June 1st.

Most of the analysts covering Costco stock are maintaining a “buy” recommendation, thanks to the company’s impressive sales and earnings growth rate. About 72% of the 29 analysts providing recommendations have a “buy” rating, and 28% are recommending a “hold.”

Analysts have a consensus target price of $214.96 for Costco stock.

Harvey’s Options Volatility Indicator


Costco has taken a slow and steady approach to modernizing. It did not rush into digital, and that has proven to be a smart play. Instead, the warehouse chain has let others innovate and then made changes to serve its membership bases

Costco Wholesale has a quick ratio of 0.47, a current ratio of 1.01 and a debt-to-equity ratio of 0.52. The company has a market capitalization of $92.58 billion, a PE ratio of 36.10, a P/E/G ratio of 2.80 and a beta of 0.95. Costco Wholesale has a 12-month low of $150.00 and a 12-month high of $212.46.