With earnings season mostly in the rear view mirror, the pickings are getting mighty slim. One sector that still has a respectable presence, however, is the retail space. We’ll see reports from a number of different retail areas, including grocers [Kroger (KR)], office supplies [Staples (SPLS)], auto parts [AutoZone (AZO)], pets [PetSmart (PETM)], and apparel [Foot Locker (FL) and Ascena (ASNA), the new name of Dress Barn].
Another well-represented area is the discount warehouse retailer, with both Costco and Big Lots (BIG) reporting. Let’s take a closer at Costco (COST), which reports on Wednesday before the open. Analysts expect the company to show a modest 11% increase in profit growth from a year ago. The whisper number matches the analyst number, which shows more modest expectations after having exceeded the analyst figure for the past three quarters.
COST has a mixed record of beating earnings estimates, having a .500 batting average (three beats, three misses, and two meets) over the past two years. What’s more, the stock doesn’t tend to exhibit exaggerated moves following earnings. If anything, post-earnings activity tends to match the pre-earnings trend.
And that’s why we like COST beyond just an earnings play. Frankly, we don’t expect earnings to make a huge impact. But we don’t expect them to get in the way of an uptrend that has covered more than 35% since August. The stock is currently enjoying a strong bounce off its 50-day moving average, a trendline that supported a similar pullback earlier this month.
On the sentiment front, the put/call ratio has spiked to an annual high, probably in reaction to last week’s pullback. With the stock bouncing higher, look for that brief bout of pessimism to unwind to the stock’s benefit. And just half the covering analysts rate COST a "buy," leaving plenty of room for upgrades, especially if earnings don’t disappoint and the stock moves to take out the 75 level to extend into all-time high territory.
As we said, don’t count on the stock popping higher after earnings. Instead, look for the rally to continue on strong fundamentals and unwinding pessimism.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in COST over the next 72 hours.
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