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What Now After Being Stopped Out of Costco Shares?

What Now After Being Stopped Out of Costco Shares?

On Friday afternoon we were stopped out of Costco Wholesale (COST) shares on the Tematica Select List when they briefly dipped below our $170 stop loss. Even though it was for the briefest of moments, the $169.90 low for the day means that protective measure was triggered following quarterly earnings that missed expectations Thursday night. Recall we sold half the position for a gain of more than 14 percent before dividends, and when paired with the stopping out of the remainder of the position, the blended return before dividends on the Tematica Select was 14 percent vs. a 9.8 percent move in the S&P 500 over the same time frame.

 

The Catalyst Behind the Dip in the Share Price

While Costco’s revenue for the quarter was a whisper below expectation, earnings for the quarter were impacted by gross margin pressure primarily due to lower gas profitability vs. a year ago. You’ve probably noticed that gas prices have undergone a large double-digit increase since last year, and even Costco is not immune. In our view, this highlights the company’s thin retail margin structure, which can create earnings volatility from time to time.

While many focused on the earnings miss, we have been far more focused on Costco’s announced membership price increase that will bring its primary membership to $60 from $55 and its Executive Memberships in the US and Canada to $120 from $110. We see those $5 and $10 increases as not egregious, especially when compared to the $100 increase in the annual fee for American Express’s (AXP) Platinum Card that kicks in later this year, and suspect the vast majority of Costco members won’t blink at the price hike.

From an investor perspective, we like the announced price hikes because it translates into higher membership fees, which account for roughly 75 percent of overall operating income and help stabilize quarterly retail margin swings. Paired with more warehouse locations as Costco continues to grow its footprint and as Cash-strapped Consumer turn increasingly to Costco for fresh foods as well as bulk items, we continue to see solid revenue and earnings growth ahead. Exiting its most recent quarter, Costco had 728 warehouses, up from 698 in the year-ago quarter, with plans to add another 29 locations during 2017.

Again, we were stopped out of the position on Friday, but given the business model dynamics and Costco continuing to benefit from the Cash-strapped Consumer tailwind, we’re inclined to revisit the shares in the coming weeks with an eye toward getting them back on the Tematica Select List at better prices.

Costco Shares Fall, But Was It All Bad News For This Cash-Strapped Consumer Play?

Costco Shares Fall, But Was It All Bad News For This Cash-Strapped Consumer Play?

On Friday shares of Costco Wholesale (COST) came under pressure triggered by quarterly earnings that missed expectations Thursday night. While revenue for the quarter was a whisper below expectation, earnings for the quarter were impacted by gross margin pressure primarily due to lower gas profitability vs. a year ago. You’ve probably noticed that gas prices have undergone a large double-digit increase since last year, and even Costco is not immune. In our view, this highlights the company’s thin retail margin structure, which can create earnings volatility from time to time.

We’ve seen such thin margins before when examining brick & mortar retailers across the board from Macy’s (M) and Kohl’s (KSS) to Kroger (KR). It makes for a challenging business, but when it comes to Costco, there’s a key differentiator above and beyond its offering of bulk products.

While many focused on the earnings miss, we have been far more focused on Costco’s announced membership price increase that will bring its primary membership to $60 from $55 and its Executive Memberships in the US and Canada to $120 from $110. We see those $5 and $10 increases as not egregious, especially when compared to the $100 increase in the annual fee for American Express’s (AXP) Platinum Card that kicks in later this year, and we suspect the vast majority of Costco members won’t blink at the price hike.

From an investor perspective, we like the announced price hikes because it translates into higher membership fees, which account for roughly 75 percent of overall operating income and help stabilize quarterly retail margin swings. Paired with more warehouse locations as Costco continues to grow its footprint and as Cash-strapped Consumer turn increasingly to Costco for fresh foods as well as bulk items, we continue to see solid revenue and earnings growth ahead. Exiting its most recent quarter, Costco had 728 warehouses, up from 698 in the year-ago quarter, with plans to add another 29 locations during 2017. More locations with more members paying more in membership fees equal more operating income to be had in the coming quarters. As any student taking Financial Statement Analysis knows, operating income is one of the key determinants of Net Income and EPS generation

Given the business model dynamics and Costco continuing to benefit from the Cash-strapped Consumer tailwind, we’re inclined to revisit the shares in the coming weeks with an eye toward getting them back on the Tematica Select List at better prices.

For those looking for more insight on the bulk product and warehouse club industry, but with a hefty dose of our Connected Society investing theme be sure to check out our most recent podcast where we talk with the CEO of Boxed.

See, fundamentals do matter

See, fundamentals do matter

Welcome to this week’s edition of Tematica Investing. As you recall, this is the publication that replaces my old Growth & Dividend Report newsletter. Each week in Tematica Investing we’re going to provide you with investment ideas and strategies based upon our proprietary thematic investing framework, and takes a long-view approach to investing based upon documented trends that are uncovered while analyzing the intersection of economic, demographic, psychographic, regulatory and technological factors.

Now, in this week’s edition:

  • There are no new additions to the Tematica Select List today, however, we continue to examine new opportunities for it and the Tematica Contender List . . .read more.
  • As we expected, volatility is back on Wall Street as the herd once again begins to focus on fundamentals.
  • Looking at what’s up with the Tematica Select List as Physicians Realty Trust (DOC) makes a big transaction
  • We’re not taking it easy, we’re adding a new theme to the Tematica stable – The Fountain of Youth.
  • All that and more thematic confirmation ripped from the headlines

Click the link below to download the full report

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Nike: Just Do It? Maybe not quite yet

Nike: Just Do It? Maybe not quite yet

Here we are again, another update to Tematica Investing, your weekly service that replaces the Growth & Dividend Report.

In this week’s edition, we tackle:

  • Expectations for GDP in the current quarter fell even further this week.
  • As expected Fed Chairwoman Janet Yellen pushes out potential rate hike timing
  • Dividend stocks come back into vogue as Yellen’s comments reverse hawkish comments last week and that’s good news for several of our holdings.
    Examining Nike ([stock_quote symbol=”NKE”]) and Under Armour ([stock_quote symbol=”UA”]) shares, but only one gets on the Tematica Contender List
  • More thematic confirmation ripped from the headlines…
  • Other securities mentioned in this report include: Alibaba (BABA), Apple (AAPL), AT&T (T) Dick’s Sporting Goods (DKS), Facebook (FB), Finish Line (FINL), Foot Locker (FL), General Mills (GIS), Lions Gate Entertainment (LGF), ParkerVision (PRKR), Physicians Realty Trust (DOC), Qualcomm (QCOM), Regal Entertainment Group (RGC), Shoe Carnival (SCVL) and Target (TGT).

Click the link below to download the full report

downalod-pdf

The Fed “Knows When to Hold’ em” as we build our contender list

The Fed “Knows When to Hold’ em” as we build our contender list

We know this may sound a bit like “the dog ate our homework” excuse as we are getting this week’s Tematica Investing out later than usual, but we wanted to address what the Fed had to say, or more like what they didn’t do.

That’s right, we dig into the outcome of the Fed’s March FOMC meeting that left interest unchanged, but led to a revision in expectations that means the Fed is increasingly less likely to boost interest rates in the coming months. In other words, as we’ve been saying for a while now, slower growth and currency headwinds will continue to restrain growth in the coming months. As such, we will continue to look for disruptive technologies, pain points and other tectonic shifts that fuel our thematic investing lens as well as smartly priced dividend payers that are also benefiting from our thematic tailwinds.

  • Also this week we add another two companies to the Tematica Contender List, both are a part of our Connected Society investing theme and stand to benefit form the increasing amount of time people are spending on Digital media. We also share the latest edition of Thematic Signals, otherwise known as Ripped from the Headlines confirmation of our investing themes unfolding around us in the world we live in.
  • While the Fed left interest rates unchanged coming out of its March FOMC meeting, it revised its GDP and inflation forecast for the US economy modestly lower vs. December expectations.
  • Regal Entertainment ([stock_quote symbol=”RGC”]) continues to benefit from a robust box office and indications point to more of the same ahead. We are reviewing our price target on RGC shares with an upward bias.
  • We are removing Philip Morris International ([stock_quote symbol=”PM”]) shares from the Tematica Select List and issuing a Sell rating at current levels
  • We are adding ComScore ([stock_quote symbol=”SCOR”]) and Nielsen NV ([stock_quote symbol=”NLSN”]) to the Tematica Contender List as part of our Connected Society investing theme given the continued shift in advertising spend to Digital platforms from TV, Radio and other legacy media.
  • More confirmation for our thematic investing lens is found in this week’s edition of Thematic Signals

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Closing out a Cashless Consumption Position in PYPL

Closing out a Cashless Consumption Position in PYPL

Actions for this Week

The following are the changes in ratings or strategy we are making as of Friday February 26, 2016:

  • Following the sharp rebound in the stock market this week, and weakening economic and market fundamentals, we’re rating ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) shares as a “Buy”.
  • Following PayPal /American Express rumors, we’re updating our PayPal ([stock_quote symbol=”PYPL”]) rating to “Sell”.

During the last few weeks, the stock market, as measured by the S&P 500, has undergone a powerful rally. As of last night, that market had climbed 8.6% from its Feb. 11 close. While we are enjoying the market’s move higher, the economic data has continued to point to a slower domestic and global economy. Examples include the following:

  • China’s official Purchasing Managers’ Index fell to 49.0 in February, marking the lowest reading since November 2011.
  • The Caixin/Markit Manufacturing PMI February reading for China dropped to 48.0, contracting for the 12th straight month.
  • China’s services sector continued to expand in February, but at its slowest pace since late 2008.
  • Euro-zone factory activity expanded at its weakest pace during the last year in February, with its manufacturing PMI falling to 51.2 from 52.3 in January.
  • Japan’s February PMI hit at 50.1 in February, down from 52.3 in January.
  • While a tad better than last week’s Flash February reading of 51.0, the final February manufacturing PMI reading for the United States fell to 51.3 from 52.4 in January. This marked the slowest increase in 28 months.
  • The ISM manufacturing perked up to a reading of 49.5, from 48.2 in January, but February was the fifth consecutive month with a reading in contraction territory. We’d note the last time this happened was during the 2009 financial crisis.
  • The domestic services economy edged down in February per the Institute for Supply Management and even the Fed’s Beige Book reported a “marginally weaker tone” in February than January.
  • Total U.S. carload traffic for January and February fell 13.5% year over year, according to data from the Association of American Railroads.

Taking all those data points together, along with those from January, tells us that the velocity of the global manufacturing economy slowed further in February. Quarter to date, the global economy appears to be hitting another speed bump. My concern is the increased probability of a repeat of what happened coming into 2016 — slow or weakening economic data, currency headwinds and cuts to earnings expectations.

Turning back to the stock market… the recent and welcome market rally has pushed the NYSE McClellan Oscillator (an indicator of market breadth based on the number of advancing and declining issues on the NYSE) even higher than last week and back to levels from which we’ve seen the market correct significantly.

sc-NYOP

In addition, as of last night, the S&P Capital IQ Short-Range Oscillator shows the market is now significantly overbought — two times overbought to be precise.

Conditions warrant staying cautious near-term

What this tells me is we once again are back in cautious territory and that means that not only are the ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) shares a buy at current levels, but we need to be cautious when adding new positions in the short-term as well. Our current thematically driven and dividend-heavy portfolio has served us well in 2016, allowing us to easily outperform the market indices.

Given the increasing probability that growth and earnings expectations will need to be revised lower yet again, amid the current overbought nature of the market, my plan is to keep these more defensive positions in Aging of the Population play Physicians Realty Trust ([stock_quote symbol=”DOC”]), Connected Society play AT&T ([stock_quote symbol=”T”]), Guilty Pleasure investment Philip Morris International ([stock_quote symbol=”PM”]) and Content is King holding Regal Entertainment Group ([stock_quote symbol=”RGC”]) intact. Even American Capital Agency Corp. ([stock_quote symbol=”AGNC”]), with its monthly dividend stream and annual dividend yield at better than 13%, warrants holding as things are poised to once again get a little bumpy.

Here’s the thing — we’ll once again have a chance to buy thematically well-positioned companies at better prices and more compelling risk-to-reward trade-offs. Let’s not jump the gun, but rather be patient and prudent. As an experienced carpenter would say, “measure twice and cut once.”

Closing PYPL position post PayPal/American Express Rumors

The best performer over the last week has easily been PayPal ([stock_quote symbol=”PYPL”]) shares, which rose more than 5% to $38.80. That has our PYPL shares up 16.6% since mid-September vs. less than 1.7% for the S&P 500. Fueling the recent move in PYPL shares was a rumored tie-up between PayPal and charge and credit card company American Express ([stock_quote symbol=”AXP”]). However, Wall Street was very quick to shoot that rumor down. With takeout speculation abating and concerns over the direction of the market near-term, my thought is it’s better to take profits and look to buy PYPL shares back at better prices. Long-term, I continue to like the company’s position as a standalone play for our Cashless Consumption investing theme. Therefore, we are updating our rating on  Paypal to “Sell” at this time.