Costco stock is a bargain

Short interest has dropped almost in half, which should be a good sign in anyone's book.

By Jim Van Meerten Sep 29, 2010 1:27PM
I've added Costco Wholesale Corp (COST) to my New High portfolio. The company operates membership warehouses based on the concept that offering members very low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover.

Rapid inventory turnover enables Costco to operate profitably at significantly lower gross margins than traditional wholesalers, discount retailers and supermarkets.

Lower prices of merchandise have effected revenue.  Transactions have been up 5% year over year, but the discounting of prices has hurt revenue growth. The best news is that the membership renewal rate of 87.5% is one of the highest in the industry.

Short sellers are running for the door. On May 14, short interest was 6.7 million shares, and on Sept. 14, short interest had dropped to only 3.5 million shares. That's a drop of almost half and should be a good sign in anyone's book. Much of the reason for the short interests having to cover can be attributed to the share-price increase.


Share price was up 15.04% in the past month alone, with the stock hitting 19 new highs in the past 20 sessions, including four in the past five. Barchart's technical indicators give the company a 96% overall "buy" signal, with the current price of around $64.65 well above its 50-day moving average of $58.04.  The 14-day Relative Strength Index is 79.91% and rising.

Wall Street loves this stock, with 16 of the 21 brokerages following the company recommending their clients buy this stock. The buy reports are based on estimates that sales will increase by 9.1% this year and 6.6% next year.  The double-digit earnings projections are increases of 13.20% this year, 11.30% next year and a five-year annual EPS growth rate of 12.79%. That's pretty impressive.
The general investor is optimistic also, with the CAPS members on Motley Fool voting 3,823 to 148 that the stock will beat the market and the All Star members in agreement by a vote of 1,233 to 34.

The stock has everything I look for:
  • Recent upward price momentum with a falling short interest
  • Wall Street brokerages issuing "buy" reports based on increases in sales and double digit earnings growth for at least five years
  • General investor sentiment overwhelmingly positive
Jim Van Meerten is an adviser to Marketocracy Capital Management who uses his model portfolios not only to manage their mutual funds but also their clients Separately Managed Accounts. You can read his blogs about those model portfolios and investing here and on Barchart Portfolio Blogs. Please leave a comment below or email JimVanMeerten@gmail.com.

Disclosure: Jim Van Meerten through Marketocracy Capital Management has an interest in the stocks mentioned in this blog.
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