(This commentary originally appeared on Real Money Pro at 10 a.m. ET today. Click here to learn about this dynamic market information service for active traders.)
You've got to respect the power of Amazon (AMZN) . When the world's largest retailer enters your industry and becomes your competitor, you've been put on notice.
However, competition with Amazon doesn't necessarily mean it's time to wave the white flag of surrender. Unfortunately, that's exactly what some investors in Costco (COST) did when Amazon announced its merger with Whole Foods Market (WFM) .
Costco was trading near its all-time high when Amazon stated its intention to purchase the organic grocery chain in June. In addition to giving Amazon a foothold in the food distribution industry, the move provided the online retail giant with strategic physical locations.
While Amazon's bold move certainly has the potential to disrupt the entire grocery industry, Costco didn't deserve the haircut it received on its subsequent plunge from $180 to $150. That move had an air of panic selling. While it is necessary to respect the competition, it's absurd to behave as if only Amazon and Walmart (WMT) will survive the coming shakeout in this industry.
Why are things suddenly looking brighter for Costco? The stock spent the summer forming a rounded bottom pattern (semicircle). When this pattern forms after a sharp selloff, it represents a shaking out of the weak hands -- investors and traders who don't have a strong commitment to the stock. This leaves the stock in the hands of investors who are less likely to sell at the first sign of bad news.
It's also interesting to note that nearly the entire time the bullish pattern was forming, Costco's MACD (moving average convergence divergence) indicator was trending higher. This creates a condition known as bullish divergence, which suggests the stock will follow the indicator higher.
Costco is scheduled to report fiscal-fourth-quarter earnings on Oct. 5, so it's interesting that last week Robert W. Baird analyst Peter Benedict raised his fourth-quarter and 2018 earnings estimates by 5 cents per share. Benedict cited a variety of positives, including a boost in online sales, powered by faster delivery and improved website functionality.
Why were investors so quick to sell this stock? Perhaps they weren't aware of the degree of customer loyalty Costco generates. Costco boasts a membership base of 47.6 million, and a renewal rate of nearly 90%.
The bottom line: Costco isn't going to run at the first sign of a fight from Amazon, and neither should investors.