Stocks get pummeled for a variety of reasons but the good ones recover. Costco is a category leader and is starting to recover from the Amazon generated decline.
NEW DIRECTIONAL CALL PLAYS
COST - Costco - Company Profile
Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.
Costco shares were knocked for a $32 loss on the news that Amazon was buying Whole Foods. There was panic that Amazon was getting into the grocery business and would decimate the sector. Nothing could be further from the truth. Even if it was it would cause the most trouble for chains like Kroger, Safeway, Sprouts Farmers Market, etc.
If the acquisition goes through, and there is growing doubt, I do not foresee Whole Foods selling big screen TVs, winter parkas, cameras, caskets, cruises or ketchup and toilet paper by the case. The two stores are not compatible.
Furthermore, 45% of Costco members are already Amazon Prime members we as well based on a Morgan Stanley survey. Members of both services are looking for deals.
Costco makes the majority of its money from memberships (75%) and very little margin on its products. Amazon and Whole Foods are not going to undercut Costco on prices. Costco had 48.3 million members at the end of last quarter, up from 47.9 million. There were 37.4 Gold Star members and 18.3 million executive memberships. Total cardholders rose from 88.1 million to 88.9 million. Whole Foods has 350 stores and only about 12 million estimated repeat shoppers.
Did you know that Costco sells its products on Amazon. Costco's private label brand, "Kirkland" makes up about 20% of Costco's sales in the stores and those same products are available on Amazon. Actually, sales of the Kirkland products on Amazon are higher than in the stores.
Earnings August 24th.
Costco shares are starting to recover from the decline. Shares appear to have bottomed at support at $1.50. I expect them to rise as we get closer to earnings. Any remaining shorts will not want to hold over an earnings report that is likely to be strong. It the market decides to weaken in August, Costco is insurance since it has already sold off. Investors will be looking to buy the beaten down stocks as a safety play.
Buy Sept $155 Call, currently $2.51, Initial stop loss $149.
NEW DIRECTIONAL PUT PLAYS
SPY - S&P-500 ETF (Updated) - ETF Profile
â€¢ The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index (the "Index") The S&P 500 Index is a diversified large cap U.S. index that holds companies across all eleven GICS sectors.
The S&P is marching slowly towards a date with destiny and 2,500. Since the median estimate by the top 16 analysts was a 2,450 yearend price target on the S&P, the arrival at 2,500 could be a tripwire that triggers an August correction. We have not had a 5% drop in a year and it has been 9 months since a 3.5% decline. With earnings rapidly playing out and most of the high profile companies will finish reporting by next Wednesday, I am going to recommend a bearish position for August/September.
I am going to set an entry trigger for a SPY put with the S&P at 2,495. Since aggressive traders normally want to anticipate a particular number, I want to enter the position just before we reach that level.
Update 7/26/17: The Dow was up +100 points, Nasdaq +10, Nasdaq 100 +20 and the S&P only gained 70 cents. The Russell 2000 lost -6 and the S&P-400 lost -15. We may not get to that 2,495 level. I am going to add another trigger/strike in case we get a failure from this level.
Only enter one strike. If one trigger is hit the other is cancelled.
Upside entry trigger: With a S&P trade at 2,495:
Buy Oct $245 put, estimated premium $3.00, initial stop loss $2,510.
Downside entry trigger: With a S&P trade at 2,465:
Buy Oct $243 put, estimated premium $3.00, initial stop loss $2,485.