Is Costco Too Close to the Top?

(C) Reuters. Is Costco Too Close to the Top?

Discount retailer Costco (NASDAQ:COST) might be most famous for that great scene in Idiocracy (“Welcome to Costco. I love you.”). Its bulk sales have also given it a lot of cache. In fact, the company recently released word about those sales. They’re trending upward, even after most of the pandemic-related stocking up has trailed off. While Costco is a very valuable operation, its current circumstances make it somewhat bearish for me.

Costco stock this year can be split into two distinct eras: the down that was unexpected, and the up that proved the down never should have happened. From January through mid-February, the stock held a fairly stable trend line. Mid-February’s arrival, though, sent the stock plunging. That one drop peeled about $40 off the share price in the space of roughly three weeks. However, three weeks after that drop, it recovered to levels seen just before the drop. From there, the stock continued a steadily upward climb to reach its peak about three weeks ago. The share price has moderated a bit since, but by that, I mean within about $20 off its high. (See Costco stock charts on TipRanks)

Costco drove the point home by releasing comparable sales figures for the month. Those were up 14.3% over the same time last month. That’s even an improvement over the month-to-month differences seen last month, which showed an improvement of 14.2%.

Oppenheimer’s Rupesh Parikh pointed out a few significant drivers of these numbers. Parikh pointed to the ongoing preference for eating at home, inflationary issues, and a consumer spending backdrop he considers “robust.”

These gains come alongside Costco’s earlier moves to restrict purchases for some supplies, including bottled water and toilet paper. Consumers have been seen engaging in stockpiling behaviors again, as COVID-19 cases appear to be surging in some places.

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Wall Street’s Take

Wall Street consensus analysis calls Costco a Moderate Buy. Based on the projections of 22 analysts that have 12 month price targets on the company issued in the last three months, 16 consider it a Buy. The remaining six call it a Sell. The Moderate Buy status is comparatively recent. Costco spent from October 2020 to September of this year as a Strong Buy. It briefly dipped to Moderate Buy in March 2021, however, and it seems to have returned there now.

The average Costco price target is in a fairly broad range. The average target is $496.63, with a high of $525 and a low of $423. With Costco’s last-seen price of $451.85, that represents an upside potential of 9.9%.

The Stock-Up King of a Shaky Hill

We saw it back in 2020, when the pandemic was getting started and the word “lockdown” entered the national lexicon. No one really knew just what a “lockdown” was. It hadn’t been seen before. Even back during the Spanish Flu outbreak of 1918, the concept of forced business closures was limited in scope, and focused mainly on schools, churches and movie theaters.

To think that people would stockpile food and various toiletries in response to governments forcing people to stay home for an indefinite period was not out of line. When people wanted to stock up, they thought “bulk purchases,” and that for many meant Costco.

The stockpiling frenzy started to dip after it was clear grocery stores could still function. Things at least started to return to closer to normal. Now, however, we’re seeing more stockpiling starting up. That’s not in response to lockdowns, but rather to issues of shipping. The supply chain is in shambles the world over–just ask the fleet of cargo ships parked off the coast of Los Angeles–and that means people are trying to insulate themselves against the effects of a supply shortage.

Some believe that the market currently overvalues Costco. That’s reasonable; Costco has been on the rise for months. The company is currently trading very close to its 52-week high. It’s also just a little short of its highest price target.

A plunge for Costco isn’t out of line. It’s safe to say that getting in now is actually getting in close to the top. Investors are likely to lose some of their investment as Costco shares rediscover a more appropriate price point.

Concluding Views

There’s an almost equally good case for holding or selling Costco. Costco stock has probably reached the top, or close to it, of where it can possibly trade. It’s hard to see how it can go much over that 52-week high. The high price target is an even more forlorn hope. Buying in now represents a pretty hefty downside risk, as almost every major milestone is below where Costco currently trades.

Sellers might be able to buy back in twice as hard later, after the price slides. Alternately, the price could stay elevated for some time to come and reward holders accordingly. About the only option that doesn’t have much risk of success is buying Costco. Buying has a lot of downside risk and very little upside potential.

Everybody’s turning to Costco to stock up. When Costco runs out of product to sell in bulk, it may have a long slide down waiting.

Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.

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