DailyPlay – Opening Trade (COST) – August 2, 2024

COST Bearish Opening Trade Signal

Investment Rationale

Consumers sentiment and trends have been deteriorating and retailers that trade at rich valuations are vulnerable to a bigger decline. Given the current market conditions and sector underperformance, Costco’s valuation appears unsustainable. The retail and consumer discretionary sectors have been lagging, and Costco’s high valuation makes it vulnerable to further declines if growth expectations are not met.

Technical Analysis

Recently, the stock broke below a crucial support level at $840, coupled by deteriorating relative strength compared to the S&P 500. And momentum has turned negative signaling the start of a bearish trend. The overall technical outlook suggests a risk of continued underperformance. 

COST – Daily

Fundamental Analysis

COST trades at 46 forward earnings, which is more than 100% higher than the industry average of 22. Despite this premium valuation, Costco’s growth metrics are not exceptionally superior to its industry peers. The expected EPS growth rate for the next 3-5 years is 11%, with expected revenue growth rate is 7%. These are only marginally better than the  industry averages of 9% EPS growth and 4% revenue growth. Furthermore, Costco’s net margin of 3% is comparable to the industry average of 2%. The high valuation coupled with relatively thin margins, indicates that investors are paying a premium for the “cult” that is Costco. 

Trade Details

Strategy Details

Strategy: Long Put Vertical Spread

Direction: Bearish Debit Spread

Details: Buy to Open 1 COST Sept 20th $800/$750 Put Vertical Spreads @ $11.35 Debit per Contract.

Total Risk: This trade has a max risk of $1,135 (1 Contract x $1,135) based on a hypothetical $100,000 portfolio risking 1%. We suggest using 1% of your portfolio value and divide it by $1,135 to select the # contracts for your portfolio.

Trend Continuation Signal: This is a bearish trade on a stock that recently turned bearish and is expected to continue lower.

1M/6M Trends: Bearish/Neutral

Relative Strength: 7/10

OptionsPlay Score: 137

Stop Loss: @ $5.68 Credit (50% loss of premium)

View COST Trade

Entering the Trade

Use the following details to enter the trade on your trading platform. Please note that whenever there is a multi-leg option strategy, it should be entered as a single trade. 

PLEASE NOTE that these prices are based on Thursday’s closing prices. Should the underlying move significantly during the pre-market hours, we will likely adjust the strikes and prices to reflect a more accurate trade entry. 

View COST Trade