Costco Pullback Offers a Chance for Investors to Stock Up

After hitting an all-time high of $393.15 on November 30^th, Costco (NASDAQ:COST) stock went on a five-day losing streak retreating to its 50-day moving average. This is giving investors a chance to buy shares of the warehouse retailer before moves on to another record high. And with the company getting set to report fiscal first-quarter results after the close on December 10^th, time may be of the essence.

What Does Costco's Chart Pattern Suggest?

From a strictly technical analysis standpoint, the opportunity presented by the pullback seems clear. Traders need to look no further than the last three months of the daily chart. There have several instances of Costco's price pattern using the 50-day moving average line as a springboard to another rally.

Most recently, the stock fell back to the 50-day line in a single day, November 9^th, before turning green on 13 of 14 days. With the red-green Christmas color chart turning back to red to kick off December, Costco's stock looks poised to ride Santa's sleigh higher into 2021.

Will Costco Report a Good First Quarter?

The potential spark that ignites the next Costco rally may take place on Friday morning (December 11^th) after investors have had the chance to digest the company's latest quarterly performance.

The consensus EPS forecast is currently $1.97 which represents 15% profit growth over the same period last year. There are two reasons why this estimate is likely to get surpassed.

For starters, Costco has topped earnings forecasts in seven out of the last eight quarters including last quarter when it beat expectations by 10%. Second, this will be another apples-to-oranges comparison of a pre-pandemic quarter and a post-pandemic quarter. Given the surge in COVID-19 cases nationwide in the early fall and the ensuing return of the fearful stockpiling shopper, a 15% bottom line improvement could easily get topped.

Granted, Costco has faced rising expenses this year which have impacted margins. SG&A and merchandising costs have increased in each of the last few quarters largely due to costs related to digital order fulfillment, higher wages, and sanitation outlays. But given the strong comparable sales figures recorded in September and October (16% and 14%, respectively) top line growth and improvements in cost management could drive a better than expected performance.

What is the Upside for Costco Stock?

If Costco does indeed beat the Street, we could see the stock return to its peak and then some. This is because the market would be reassured that sales growth trends remains strong and that margins are improving or at least stable.

Where Costco's stock price goes from there is anyone's guess, but all indications are it will build off its potential 25%-plus 2020 performance next year. Worsening virus caseloads, a reversion to lockdown restrictions, and consumers increasing comfort with online ordering point to a strong possibility that Costco and other warehouse retailers witness high sales volumes throughout the winter months.

Sell-side analysts seem to see a path for Costco's stock to continue higher. Over the last three weeks, ten firms have reiterated their 'buy' ratings on Costco with price targets ranging from $390 to $430.

Is Costco Stock a Long-Term Buy?

Regardless how the winds blow for Costco this week, the company remains a dominant player in retail—and the stock has 'buy and hold' written all over it.

The growth track record is outstanding. Earnings increased at a 13.5% annual pace over the last five years and profit growth was accelerating prior to the onset of the pandemic.

Putting the obvious pandemic-driven demand aside, Costco is a very popular one-stop shopping destination for families and people that like to buy in bulk. The value proposition is evident by Costco's membership growth. With more than 100 million Costco cardholders and a healthy 90%-plus renewal rate, the benefits to consumers (and Costco's all-important fee income) are clear.

Income-oriented investors will especially appreciate that Costco is one of the most shareholder-friendly of S&P 500 constituents. Not only has the company raised its dividend for 15 straight years, but it has been known to reward shareholders with generous special dividend payments.

Last month Costco announced that its shareholders will be getting a $10 per share holiday bonus which is payable on December 11^th. This marked the fourth time in the last eight years that Costco announced a special dividend on top of its regular quarterly dividend. It's not often that a company gives $4.4 billion in cash back to investors.

So, whether the income stream or the growth potential (or both) gets you excited about Costco, one thing is clear. This stock is a proven winner. And as history has shown, when it takes a bit of a dip, it's usually a good time to load up the shopping cart.