TRADE INSTRUCTIONS
Date: May 24, 2017
Name: Costco Wholesale Corp.
Symbol: COST
Type: Short Sale or Long Put
Limit: N/A

Reminder: 3TL stand for 3-Time Loser, which means this alert if for a stock that I believe is at risk of declining in value soon so the appropriate trade would be either a short sale or long put, but DO NOT GO LONG! And since you can play it a number of ways with put options in terms of strike prices and expiration dates I’m leaving it up to each of you to decide what, if anything, you want to do with it.

For that reason, it will not be tracked in our portfolio. This trade is not a substitute for our usual buy recommendation but is simply an extra “bonus pick” for you to consider. Here’s why this stock qualifies as a 3-Time Loser according to my system.

TRADE RATIONALE
Let’s be honest; Costco is the store where we all hate to shop, but we do it anyway because of the bargains. Attempting to park in a Costco lot is what I imagine competing in a demolition derby might be like, and trying to navigate its crowded aisles reminds me of my college psych classes with studies that experimented with how many mice can be crammed into a shoebox before they start turning on each other.

Despite recent weakness in the retail sector, COST is up more than 10% over the past six months. That’s because Costco is held to a different standard, as its mammoth stores are considered impervious to an attack from online e-tail giant Amazon.com since it would be pretty hard for a drone to deliver a 64-count crate of off-brand paper towels or a 10 pound can of baked beans.

However, even if Amazon is not a threat it is still difficult to justify COST’s forward PER of 27 given its 2% profit margin and 6% growth in revenue. That’s why its PEG ratio now exceeds 3 (anything below of 1.0 is considered good and above 2.0 deemed pricey), and its IDEAL score is only a 1.

Costco releases its next quarterly earnings report after the stock market close tomorrow (Thursday, May 25), and most analysts are expecting a “whisper number” a couple of pennies higher than the company’s official guidance. For that reason, I don’t see much more upside potential even if the numbers are good, but I would expect a quick 3 – 5% drop if it delivers anything less than that.