A recent insider buy is only the latest reason to buy COST stock
Costco (NASDAQ:COST) shareholders were given yet another example of why timing is everything. Despite delivering a solid earnings report on December 9, COST stock is only up about 4%. But concerns about inflation, supply chain disruption and the omicron variant of the coronavirus has weighed on the market in general and the retail/wholesale sector in particular.
However, a recent insider buy complements a bullish flag setup. And that makes us believe that COST stock should be on your watch list for stocks that may participate in a Santa Claus rally.
A Large Insider Buy
One catalyst for Costco in the short term is a recent purchase of nearly $500,000 in COST stock by one of its directors. There are many reasons why insiders may sell a company’s stock (these are real people with real lives). However, there are far fewer reasons for individuals to purchase a stock. The most notable one being a belief that the stock is undervalued.
So far, that news is not making much impact on COST stock, but that’s not surprising as many investors are in the process of stepping away for the holiday. These investors however will be making a watchlist and checking it twice with the markets closed. And when they do, I suspect that Costco will look like a buy when the markets open for the last week of trading.
Inflation Remains at 40-Year Highs
I know that many investors are getting tired of hearing of the inflation story. However, a simple interpretation of the data illustrates why it will be a positive catalyst for COST stock. In the first place, Costco consumers skew towards a higher income bracket. But that doesn’t mean the inflation narrative doesn’t hold. At any price level consumers want their dollars to stretch further.
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That works in Costco’s favor as loyal consumers enjoy the experience of finding good values at bulk prices in the company’s warehouse clubs.
Is Costco Overvalued?
When you look at Costco’s P/E ratio that sits over 47 it’s easy to say it is. But a more nuanced look suggests that the stock has further to run.
One knock on COST stock was that the company was going to have difficult comps coming out of 2020. But so far that hasn’t been the case. Revenue for the first three quarters is 17% higher than the first three quarters of 2020. And, the company has been sequentially higher in every quarter.
And when you look at earnings per share, the news is even better. Costco has delivered 31% higher year-over-year earnings and has posted sequential gains in every quarter.
Plus, as I pointed out in the summer, Costco continues to retain its members at a pace of over 90%. And thus far, there’s no evidence that the company is losing customers after increasing membership fees by 10% on November 1. This is a critical statistic because Costco makes very little money off their grocery business.
COST Stock Looks Ready to Roll
Costco has enjoyed multiple boosts to its price target in the two weeks since the company’s earnings. As a company like Apple (NASDAQ:AAPL) recently showed, many analysts can be late to the party when it comes to upgrading a stock.
I think this is the case with COST stock and I think the insider buy is a key indicator. I would expect the consensus price target to move higher and with it the Costco stock price. And that’s why if the last week of the trading year brings a Santa Claus rally, I’d expect Costco to be among the stocks leading the charge.
Companies in This Article:
| Company | Current Price | Price Change | Dividend Yield | P/E Ratio | Consensus Rating | Consensus Price Target |
|---|
| Costco Wholesale (COST) | $964.01 | +0.9% | 0.48% | 58.18 | Moderate Buy | $908.81 |
Experience
Chris Markoch has been an editor & contributing writer for InsiderTrades.com since 2018.
Areas of Expertise
Value investing, retirement stocks, dividend stocks
Education
Bachelor of Arts, The University of Akron
Past Experience
InvestorPlace
