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Why Costco Wholesale Corporation Stock Is Still Worth a Look

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Costco Wholesale Corporation (NASDAQ: COST ) stock went on sale several times in the past 12 months and we bought it in bulk and we profited every time. Today, I want to go long COST stock, but this time it's a little different.

Since Costco stock is at all time highs, I need to adjust my strategy to account for the upcoming earnings report.

In 2017, things were shaky for a while thanks to headlines from Amazon.com, Inc. (NASDAQ: AMZN ). In June, COST stock fell 15%, but it has since recovered and set new highs. COST reports earnings tomorrow after hours and the stock is coming into it near all-time highs.

How to Trade COST Stock

I am a fan of the store and Costco stock, so today, I want to go long, but since the risk of earnings is hours away, I want to temporarily guard against a potential dip. Earnings reports are binary events. The short-term reaction to the headline is a complete guess regardless of the quality of the numbers management delivers.

While its 17% year-to-date jump is impressive relative to the flat SPDR S&P Retail (ETF) (NYSEARCA: XRT ), COST stock still lags the retail star Wal-Mart Stores Inc (NYSE: WMT ). Nevertheless, it shows that COST management is doing the right things to survive the AMZN era.

Fundamentally, COST is not outrageously expensive, but it's not a screaming bargain either. It has a price-to-earnings ratio over 30 and for a retail stock that is high. It's even higher than WMT whose stock is up twice as much as COST. For absolute comparison consider the fact that Apple Inc.'s (NASDAQ: AAPL ) P/E is under 19.

Technically, Costco stock is filling in a trend-line breakout that happened on Nov. 29. The move brought the stock to new all-time highs. From here, if the bears were to exert downside pressure, they'd want to retest the neckline area, which is around $178-per-share.

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From a longer term perspective, I see that on the last correction, COST stock bulls defended the $152-per-share zone with gumption. As long as the macroeconomic conditions persist, I expect they would do the same again.

The Bullish Trade: Sell the COST Apr 2018 $155 naked puts and collect $1.20 to open. Here, I have an 85% theoretical odds of winning, but if the price falls below $153.80, I would own shares and accrue losses.

Selling naked puts carries big risk, especially when a stock is at all-time highs and going into an earnings report. So, to mitigate some risk, I will hedge my bet with a temporary bearish spread.

The Bearish Hedge: Buy the COST Jan $180/$178 debit put spread for 50 cents. If the price falls through my spread, then I have a chance to triple my money.

Taking both trades would result in a net credit. So, as long as COST stays above my bullish trade, then I am a winner already. I have until mid-January to close my bearish bet. And any premium I recover from selling it to close would be incremental profit.

Ideally, I want COST to fall through my spread in the next few weeks, but hold above my bullish trade. This way, I can close the debit put spread for a profit and let the bullish premium expire for maximum profits in my favor.

Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.

Get my newsletter for free here . Nicolas Chahine is the managing director of SellSpreads.com . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits .

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The post Why Costco Wholesale Corporation Stock Is Still Worth a Look appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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