Option Trade 
Costco Wholesale Corporation (NASDAQ:COST) Calls 
Tuesday, 24th May, 2016

** OPTION TRADE: Buy the COST Oct 2016 150.000 call at approximately $3.30. Place a pre-determined sell at $6.60.

Note: No protective stop losses added -- but if you wish to do so make it $1.30.

by Ian Harvey

May 24, 2016

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, is scheduled to report its fiscal third-quarter results before the market opens on May 25. Analysts forecast the company to post earnings of $1.22 per share, up from $1.17 during the same period last year.

Costco has a niche in this sector, and has been doing well, and consumers are still interested in finding deals, which they can easily find at Costco if they are willing to pay the annual membership and buy in bulk. The “Amazon effect” has hit Target, but Costco is fairly immune to Amazon simply because of its bulk-buying business model. While it is easy to buy electronics or toys on Amazon, consumers are not as likely to go to the site to purchase bulk toilet paper or food.

With retailers ranging from Macy's to Target reporting lackluster results due to weak consumer spending, Costco is expected to buck the trend. Currency and gas-price deflation have taken their toll on the company's results, but its warehouse-club model has so far protected Costco from the rising threat of e-commerce.

Costco is also ending its long-term partnership with American Express next month in favor of Visa , a move that could expand its membership even further.

The stock has been trending lower, with shares down 11.6% on the year, but a turnaround is very likely.

Costco Wholesale Co. has a 50 day moving average of $150.36 and a 200 day moving average of $153.96. Costco Wholesale Co. has a one year low of $117.03 and a one year high of $169.73. The stock has a market cap of $62.73 billion and a price-to-earnings ratio of 27.367.

Recently, Costco Wholesale was upgraded by analysts at Zacks Investment Research from a “sell” rating to a “hold” rating.

According to Zacks, “After missing the Zacks Consensus Estimate by 6.8% in first-quarter fiscal 2016, Costco again succumbed to a negative earnings surprise of 3.1% in the second quarter. The quarterly earnings of $1.24 per share also fell 8.1% year over year due to higher operating expenses. Lower traffic count and foreign currency headwinds impacted the quarterly results as well. On the other hand, top-line did increase but fell short of our estimate for the fifth quarter in row. Investors are also worried about Costco's sluggish comps performance. While lower gasoline price is impacting the U.S. comps, currency fluctuations is adversely affecting international comps. Nevertheless, we still believe that Costco continues to be one of the dominant retail wholesalers based on its breadth and quality of merchandise offered. Also, the company’s diversification strategy acts as a natural hedge against risks that may arise in specific markets.”

As well, Costco Wholesale Co.’s stock had its “buy” rating reissued by equities researchers at Sterne Agee CRT in a report released last week.

Also, several other equities research analysts have recently commented on the company.

• Deutsche Bank lowered their target price on Costco Wholesale from $198.00 to $196.00 and set a “buy” rating on the stock in a research note on Monday, May 16th.

• Morgan Stanley restated an “overweight” rating and issued a $165.00 price target (down from $170.00) on shares of Costco Wholesale in a research note on Monday, May 9th.

• Jefferies Group restated a “hold” rating and issued a $135.00 price target (down from $142.00) on shares of Costco Wholesale in a research note on Sunday, May 8th.

• Finally, Piper Jaffray restated an “overweight” rating and issued a $173.00 price target on shares of Costco Wholesale in a research note on Thursday, May 5th.

Twelve investment analysts have rated the stock with a hold rating, fifteen have issued a buy rating and two have issued a strong buy rating to the company’s stock. The company currently has a consensus rating of “Buy” and an average price target of $168.89.

Harvey’s Options Volatility Indicator

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the COST Oct 2016 150.000 call at approximately $3.30. Place a pre-determined sell at $6.60.

Note: No protective stop losses added -- but if you wish to do so make it $1.30.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.



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