The next time you see a high-quality company report a seemingly disappointing quarter, don't rush to judgment, Jim Cramer told viewers of his "Mad Money" program Monday. Instead, wait to hear the company's conference call and get the full story.
Investors didn't heed this advice when Costco Wholesale Corp. (COST) recently reported its fiscal fourth-quarter results. The stock instantly dipped 5% at the open, only to quickly rebound more than $10 a share once investors discovered that Costco's earnings weren't disappointing at all.
The bears assumed that Costco, which had been up 42% for the year and was trading at 35x earnings, was due for a pullback and they were looking for any reason to sell. So when revenue and earnings came in roughly as expected, they headed for the exits. But Cramer noted that Costco is more than just a retailer -- it's also a club, one with 98.5 million cardholders (including my wife) who renew at a rate of 90.9%.
There was a lot to like in Costco's earnings, Cramer explained, including 200,000 new members at the company's Shanghai store in just a matter of weeks. In addition, Costco is largely unaffected by tariffs, as it has the flexibility to simply substitute one item thanks to its limited selection when compared to other retailers.
Costco also has a long history of great execution, Cramer noted, one that doesn't add new stores just to please Wall Street. Costco takes a long-term approach to running its business and that makes betting against the company a big mistake. That is a good summary of the fundamentals as we know them, but are the charts and technical indicators also bullish? Let's check.
In this daily bar chart of COST, below, we can see that prices have been in an uptrend from late December. Prices moved up with a positively sloped 50-day moving average line. Tests of the 50-day line turned out to be buying opportunities. The 50-day line crossed above the 200-day line in early April for a bullish golden cross of these two indicators. The daily On-Balance-Volume (OBV) line moved up steadily from December to confirm the uptrend and tell us that buyers of COST have been more aggressive. The OBV line is right up at its highs and is showing no bearish divergences to the price action. The trend-following Moving Average Convergence Divergence (MACD) oscillator is above the zero line in positive territory and poised for a bullish crossover to the upside.
In this weekly bar chart of COST, below, we can see a strong and durable uptrend the past three years. Prices move steadily higher and do not seem to get extended and then suffer a prolonged correction. Prices are above the rising 40-week moving average line and the weekly OBV line has been rising for three years, which signals a long-term pattern of accumulation (buying). The MACD oscillator is extended on the upside and shows some crossovers and signals some profit taking on strength.
In this Point and Figure chart of COST, below, we can see a bullish upside price projection or target of $381. We also see that a trade at $279.70 could start to weaken the picture.
Bottom line strategy: COST seems to have a bullish fundamental story and strong charts. Approach from the long side but be sure to have a sell stop if prices close below $279.
