Chart of the Day – COST on Talking Numbers on CNBC

by Enis July 5, 2012 3:05 pm • Commentary

Here’s a preview of what I’ll be discussing on Talking Numbers today between 3:20 and 3:30 pm CNBC:

COST has been a bastion of strength over the last couple years, capitalizing on a weak recovery by catering to price-conscious consumers through a continued devotion to value.  Their focus on low cost is in the name.  This is an American success story, as less than 15% of its sales are outside the U.S. and Canada.

The 2 year chart shows a continued strong uptrend.  The stock broke out to new all-time highs last week:


The stock is about 10% above its 200 day ma, which has almost always been a reason for a short-term pause over the last 2 years, so I expect some near-term weakness and consolidation of this recent breakout.

I am relatively confident that the broader market put in a convincing long-term top in April of this year.  Signs are building towards a potential global recession in the second half of 2012.  Against that backdrop, I am not comfortable holding the large majority of stocks in this market.  Earnings and economic growth go hand in hand, and I just don’t see the growth.  But COST is an exception.

In the last bear market in stocks between 2007 and 2008, COST massively outperformed the SPX index for the first 9 months:


In fact, even as the index fell 20%, COST was UP!  COST is a classic trade-down name, benefitting from an increasingly cost-conscious public.  While I don’t think COST is due for a massive rally anytime soon, barring a financial systemic collapse, I think any decline will be limited.  Interestingly, COST’s current P/E of 25 is basically the same as it was in late 2007.  I have no trade to do here, but I might look at bullish structures on a pullback to the $90 level on COST.