New Trade – Costco (COST): Not Buying in Bulk

by Dan May 8, 2014 10:46 am • Commentary

Yesterday I laid out a hypothetical bearish trade in COST in front of their April sales report this morning.  We chose not to press into the event as we are trying to be disciplined and enter shorts on rallies, which is what we have this morning after printing a 5% comp vs the 4.2% estimate.  While the news is good today, there are 3 inputs that I do not like:

1. Valuation – trades 25x trailing earnings and 24x this year that are only expected to grow 4% year over year and trades 22x FY2015 that is expected to grow 12% (which seems like a fairly rosy ramp).

2. Technicals – as detailed below, the set-up is precarious and if the stock tests $110 again in this market there’s no guarantee that it will hold.

3. Implied Vol – the price of options is fairly cheap over the next month, despite upcoming events with 30 day at the money iv ~1 point from the 52 week lows at 13.58, while 6 points off of the highs of ~21

COST will report their fiscal Q3 on May 29th, the stock has generally not been a big mover on earnings with the average one day move of about 2% over the last few years.

Trade: COST ($114.50) Bought May30th weekly 113 put for  1.31

Break-Even on May 30th expiration:

Profits: below 111.69

Losses: between 111.69 and 113 lose up to 1.31, loss full 1.31 above 113

Rationale:  The April comp was fine, but I suspect if the stock had not sold off into the number over the last few days that it would not be enough to take the stock higher.  I still like playing for a re-test of 110 in the coming weeks and think that the potential for disappointing guidance on their Q3 call on May 29th could be the catalyst.  On a  move to my strike I will look to spread creating a vertical or a calendar.




Original Post May 7th, 2014: Name That Trade – COST:  Exit the Triangle of Death

Tomorrow morning COST will report their April sales before the open.  The options market is implying only a 1.25% one day move using the May9th 112 straddle.  I don’t know about you but that seems a bit cheap to me given investors to shoot first and ask questions later on the slightest bit of bad earnings news (I have 5 stocks on my board down between 15% and 25% plus today alone AOL, FEYE, GRPN, KING & WFM).  If I were long COST I would possibly be looking for short term protection into a potentially volatile event, and if I were inclined to play from a directional standpoint, options certainly don’t appear to be pricing to much risk.

The 18 month chart below shows the textbook head and shoulders top formation with the neckline at $110, a level it is quickly approaching again:

COST chart since Jan 1, 2013 to present from Bloomberg
COST chart since Jan 1, 2013 to present from Bloomberg

The stock’s rejection at the 200 day moving average (yellow line) shows that the bounces off of support are getting weaker and weaker, and that if the stock tested $110 on bad news we could see a quick move down to $105.

That technical set up, coupled with the low price of options into the event is causing me to consider taking a shot, but i am going to be disciplined and look to fade bounce back to resistance.  We’re not putting on a trade but if I were to play, this is how I would:

Trade: COST ($112.05) Bought to Open May 9th weekly 112 put for .65

Break-Even on May 9th expiration (Friday):

Profits: below 111.35

Losses: btwn 111.35 and 112 lose up to .65, max loss of .65 above 112