Costco Wholesale Corp. (COST) is pressing against a key resistance level in Monday’s pre-market in reaction to bullish analyst commentary. The stock is still in the red for 2021 after posting a 28% return in 2020, underpinned by its commanding retail position during the COVID-19 pandemic. Taken together with 2019’s 36% return, the underperformance isn’t usual, given the market’s classic warning that “the big the move, the broader the base”.
Post-Pandemic Economic Surge
Big box store sentiment has deteriorated this year, with rival Walmart Inc. (WMT) also posting a negative year-to-date return. Despite investor reluctance, Costco is perfectly positioned to benefit from the post-pandemic economic surge in the United States and other parts of the world, given its massive footprint in North America, Asia, Australia, and Europe. It’s also trading close enough to the 2020 high to potentially support an advance toward the 500 level.
Telsey Advisory Group analyst Joseph Feldman raised his target to $375 on Monday, noting “Costco should remain a share gainer, with its solid sales, high membership renewal rates, and square footage growth of LSD. Costco should continue to generate solid EPS growth, driven by a MSD-DD comp, MSD-HSD membership fee income growth, healthy digital growth, and lapping COVID-19 related costs. We maintain our ‘Outperform’ rating, applying a P/E multiple of ~35x to our new FY22 EPS estimate of $11.15.”
Wall Street and Technical Outlook
Wall Street consensus also stands at an ‘Overweight’ rating, based upon 19 ‘Buy’, 4 ‘Overweight’, and 10 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $325 to a Street-high $415 while the stock is set to open Monday’s session more than $25 below the median $400 target. The Q3 2021 earnings report on May 27 could lift these targets.
Costco rallied above the February 2020 high at 325 in July and took off in a strong uptrend that posted an all-time high at 393.15 in November. It sold off more than 80 points into March and bounced strongly, grinding out a straight line recovery that stalled at the .786 Fibonacci retracement level at 375 about two weeks ago. A rally above this harmonic barrier should support a rapid advance into the 2021 peak near 400, setting off a potential breakout attempt.
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Disclosure: the author held no positions in aforementioned securities at the time of publication.