With the stock now trading at a forward price to earnings multiple of 28, which is some 11 points above the S&P 500 (SPX) index, there's more potential risk there are rewards. Since a week ago the stock has delivered 8% gains, reaching a high at $153.88, following a move from $142. COST could not break resistance at $154.
TheStreet's Jim Cramer, whose Action Alerts PLUS holds Costco, disagrees. He and AAP Research Director Jack Mohr have reaffirmed their $175 price target and said Costco's recent earnings were strong. Costco membership fee income has increased and new member sign-ups were up 15%.
Unlike those who would take profits, AAP is staying put.
"We are bullish long term (hence our $175 price target), but expect shares to really experience their boost after the company reports July sales, as we believe customers are awaiting the late-June transition from legacy [American Express (AXP) - Get Report ] to the Citi (C) - Get Report /Visa (V) - Get Report co-brand card (the latter of which offers far larger rewards) before spending on big-ticket items," they wrote this week. Citigroup and Visa are also AAP holdings.
COST closed Friday at $149.08, down 0.4%. This means the stock has given up about 3% since reaching $153.88. Take a look at the chart, courtesy of TradingView.
You can see from the two opposing short black arrows, the stock tested resistance at $153.68 and went back down. Not only does the stock trade at a premium to the rest of the market, its fiscal 2016 estimates of $5.32 per share implies less than 1% growth. That's not enough of a catalyst to send it higher.
To that end, the 3.5% gap created from the earnings report, near the 20-day moving average will need to be retested. For that matter, support at $146 is likely the next target, which is where COST may trade until its next earnings report.
If you have patience, like Cramer, holding the shares won't hurt. But the stock, given that it's no longer a bargain, is likely dead money for three months. For those on the sidelines looking to get in, the next buy point is at $154 per share.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.