Warehouse retailer Costco (COST) released their quarterly earnings results after the close on Thursday with mixed results.
For the last quarter, Costco beat their earnings target by $0.07. That makes it the seventh consecutive earnings per share beat for the company.
Revenue, now that was a little bit of a soft spot.
While Costco did beat analyst’s revenue expectations, year-over-year revenue growth came in at just 1%. That’s the lowest revenue growth for Costco in more than five years, which is why investors are selling the stock this morning.
The company did not announce a stock split for the upcoming quarter, which may have disappointed investors. Recently, Costco has turned into one of the most anticipated stock splits as shares are preparing to break above $1,000.
It’s simple, shoppers have been getting more cost-conscience.
The company’s lighter revenue figures were the result of shoppers finally getting a little tighter on their budgets.
The last two years have worn shoppers out as inflation raised prices faster than anytime in decades, but Costco was able to thrive in that environment as shoppers adopted the bulk buying approach to lowering prices.
We’ve seen worries about a recession lead to a slowdown in spending on discretionary spends as well as more bargain shopping on the staples. Costco deals in both categories, hence the slowdown in revenue.
Costco earns more than 70% of their revenue from membership fees. It literally puts billions of dollars in the company’s account every year.
Those membership fees were increased starting September 1, meaning the company will start realizing an 8.3% increase to 70% of the company’s revenue.
Of course, Costco doesn’t realize all of that increase to revenue in one quarter, but it does mean that the next four quarters will see a meaningful increase.
The last membership increase was seven years ago in 2017 – the raise was 8.3% then too – ahead of a 50% rally in the stock over the following year.
Costco’s stock is pulling back slightly today because of the revenue miss and the fact that the stock split announcement didn’t happen.
The stock moved to the lower end of a trading range that has been in place since mid-August. That low price of $875 has stood up as support for the stock today to offset the earnings-related selling.
Just below the $875 mark lies Costco’s 50-day moving average.
The 50-day has been in a bullish patter since February, 2023, and should be considered the strongest driver of the stock’s next move higher.
Shares of Costco remain in a long-term bullish trend suggesting that a break above $1,000 is likely to lead to another 20% run higher for the stock to a target of $1,200. That move would represent a 35% rally from this morning’s price.
I’ll cover how to trade this trend below.
Costco’s management comments that “the insatiable demand for gold bars and silver bullion continued in Q4”. This is a great indicator for the public’s appetite for gold.
I covered the building gold market rally in May (https://moneymorning.com/2024/05/15/gold-market-outlook-2024-bullish-fundamentals-and-technicals-indicate-strong-rally-ahead/)
The I followed-up on the gold trade in and then followed-up in August (https://moneymorning.com/2024/08/19/golds-election-year-surge-could-unlock-30-upside-by-december/).
During the conference call, Costco’s CEO was asked if the company was considering offering their own “Kirkland Signature” gold bars. The answer was "No plans at this time".
The gold trade continues in full swing, which is where your second trade idea from Costco’s earnings report comes from.
Shares of the SPDR Gold Shares (GLD) – a proxy for Gold – recently went on another 6% surge higher.
The move took just ten days and has set the GLD shares up for a healthy retracement. That “dip” is one that investors without gold may want to consider.
The chart of GLD suggests that we’ll see support at $240, which serves as the next “buy the dip” opportunity for the Gold Shares.
Year-to-date, the Gold Shares are trading 40.5% higher, outpacing all of the major indices.
After a short pullback, Gold will have one major catalyst, the November elections. But we’re not likely to see the run end there.
Any turmoil after the elections will cause gold prices to surge even higher.
And then there’s the Fed.
The Fed’s will continue to lower interest rates as we roll through 2025. Those lower rates will pressure the dollar, adding to demand for Gold.
There’s no such thing as a “perfect trade”, but the “perfect storm” that is being created by the elections, the fed and global uncertainties make the bullish gold trade very close to perfect.
The first is simple, own them.
Both Costco (COST) and the Gold Shares (GLD) have more than 25% upside potential as they continue their bullish run higher.
Both are long-term investments meaning that you can keep it simple and just add the shares to your portfolio.
For traders that are looking to leverage the expected moves, consider using long-term call options or LEAPS.
Long-term options on Costco are especially attractive given the stock’s high price.
The January 15, 2027 COST $1,000 Call currently costs $11,000, slightly less than buying 11 shares of Costco.
That option would be worth $27,400 if Costco hits the $1,200 target anytime within the next year. That profit amounts to $16,400 or 149%.
Buying 11 shares of Costco would cost $9,724. Those 11 shares would be worth $13,200 when the stock hits $1,200 per share, a 35% return.
That’s a quick example of how using long-term options as a proxy for buy-and-hold investing can benefit an investor over the long run.
As always, please make sure that you have the proper education and experience when considering options for your portfolio.
