As we've been discussing throughout the past six months, a
range-bound market means you're likely better off moving in and out
of certain stocks and sectors as they prove timely. Buy-and-hold
appears dead for now, although few have the ability to profit from
very short-term trades either.
Costco (Nasdaq: COST)
highlights the value of a "mid-term trade." In just six weeks,
investors have made about +25% from this investment. Yet
Wednesday's quarterly report from this retailer tells us it's time
to "sell on the news."
Whenever you see a stock make a solid move as Costco has, it leads
you to wonder if business is trending well ahead of expectations.
That's why it makes sense to hang on and see how quarterly results
fare. I've noticed solid upward moves in four other retail pays I
Best Buy (
Leapfrog Enterprises (
Office Depot (NYSE: ODP
Casual Male (Nasdaq: CMRG)
. Is business improving for these firms, or is the recent spike in
Costco and these other companies' shares simply due to a
re-rotation back into retail?
Wednesday's dismal ADP jobs report, which is a precursor to
Friday's monthly employment report from the Labor Department,
should give pause. So the retail trade may be premature and it may
be time to book profits in recent retail gainers. That's what
investors are doing with Costco, which is pulling back -1.5% today
after running from $60 to $65 in the second half of September.
Costco's quarterly sales slightly lagged estimates (when you back
out the impact of gas price changes), although per share profits
were slightly better than analysts had expected. And judging by the
numbers, the recent rally makes this stock now look fully valued.
Thanks to the tepid
, Costco's sales are likely to only rise +6% to +7% in the
that began last month. Profits are likely to grow at low
double-digits. Yet shares trade for about 20 times projected fiscal
2011 profits and are really no bargain.
Action to Take -->
Whether it's the broader stock market or an individual stock, I'm
always on the lookout for a sideways chart. When a stock is rising,
buyers outnumber sellers. When a stock starts to move sideways,
that's a sign that either sellers are stepping in or buyers are
petering out. Either way, it often results in the next move being a
downward one, as sellers eventually overwhelm buyers. I'm not
predicting that for Costco specifically, but you may want to use
this as a signal to take profits if you have secured a solid run in
As noted above, select retail stocks have had a nice run, though it
is unlikely they are reflecting improving consumer spending. On
Wednesday and Thursday, a wide range of retailers will weigh in on
how they fared in the back-to-school season. How the sector trades
in response will be telling. If Costco is any indication, investor
sentiment may be cooling and it may be wise to book any profits
you've had on "mid-term trades" like this one.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.