New Trade – $COST Cutting

by Enis March 13, 2014 12:58 pm • Commentary

COST has become rangebound over the past nine months, after a monster uptrend from 2009 to 2013’s high, a period in which the stock tripled, and became one of the largest retailers in the world.

The daily chart shows the current rangebound situation:

COST daily, 200 day ma in yellow, Courtesy of Bloomberg
COST daily, 200 day ma in yellow, Courtesy of Bloomberg


The stock bounced off the $110 support level at the lows in early February.  That was a very steady downtrend from early December to early February.  Since that bounce though, the stock has struggled at getting above the $115-$116 area, which coincides with the 200 day moving average, which was broken for the first time in more than 2 years.   

The stock’s failure at the 200 day ma is a concerning sign on the technical side, but the other issue is the continued weak fundamentals.  Dan first laid out our negative thoughts on COST in a MorningWord post in December, with the following conclusion:

But technicals aside, COST has now missed earnings for 2 straight quarters, registered only 1% year-over-year earnings growth for both.  The first miss could be forgiven as a one-off event, but now that it’s two in a row, market participants could start to ask more questions about the underlying strength of Costco’s business.  It could be saturation from prior growth, increased competition, or simply a poor macro environment.  Whatever the reason, COST shareholders have hardly ratcheted down expectations despite 6 months of weak operating results.  That might change after today.

Since December, COST numbers have not improved.  In fact, we’ve been surprised at the stock’s resilience since its terrible February earnings report, though many investors clearly wrote it off to the weather, and expect better growth for the rest of 2014.  Those higher expectations could be setting up for disappointment.

Add the technical and fundamental situation, and we like playing for a move back to the $110 support level in the coming weeks:

Trade: COST ($114.68) Buy the Apr4th 115 Put for $1.80

– Buy 1 Apr4th 115 Put for 1.80

Break-Even on April 4th Weekly Expiration:

Profits:  below 113.20 gains

Losses:  Between 113.20 and 115, lose up to 1.80, above 115, lose the full 1.80

Rationale: COST has failed at the important 200 day moving average.  We want to play for a pullback over the next few weeks, and still capture the potential same-store-sales number catalyst, which is slated to be released on April 3rd.  We’ll look to take this trade off near $110 support or spread in on weakness.