Costco’s $1.50 Hot Dog Is Nice, But the Gold Bars Really Got Me Trade Hungry

To put it bluntly, this morning's March CPI print was simply hot. 

Consumer prices were up 0.4% month over month at both the headline and at the core. This was in line with February's 0.4% growth. Economists had been looking for growth of 0.3% at both levels. Hot. On a year over year basis, headline inflation increased to 3.5% from 3.2% in February. Wall Street had been looking for 3.4%. Hot. At the core, year over year CPI landed at growth of 3.8%, inline with February when a slight tick lower to 3.7% had been expected. Hot.

This is problematic to say the least. Obviously any economist discussing interest rate cuts at this point would be looked at as a fool. Chris Versace and I told anyone who would listen that current rates were probably not restrictive enough, way before anyone else that I know of even had an inkling. Did anyone listen? Of course not. I think Fed Gov. Michelle Bowman finally caught on last Friday.

As of 10:30 ET this morning, incredibly, Fed Funds Futures trading in Chicago was still pricing in a first 25 basis point rate hike as late as September 18th (69%) and 50 basis points worth of cuts for calendar 2024 (66%). Still not even a tiny percentage of a probability for rate hikes being priced in anywhere. My opinion? That's just a matter of time. This has me thinking about Costco COST. Why? Let me explain.

About Costco 

Okay, so consumer prices are hot, hot, hot and catching up to wage growth. Remember, with core inflation at 3.8% and wage growth at 4.1%, that the 4.1% wage growth in the BLS survey is only inclusive of full-time workers. 

The problem there is that full-time employment has been a net negative for I think four consecutive months now. All of the wage growth being boasted about by the ignorant and the disingenuous, has been part-time on balance. Not exactly a gang-busters style labor market.

Now, where do budget conscious consumers do their shopping during times of rising prices or economic strife? Retailers like TJX TJX and Ross Stores ROST come to mind as they buy excess goods and last season's styles en masse and resell them to the public at a discount. 

Dollar stores such as Dollar Tree DLTR and Dollar General DG come to mind. Even Walmart WMT. So does Costco. No, you don't get out of a trip to Costco for a few bucks. But you do buy in bulk and find savings in purchasing large amounts of what you need at a unit price discount.

That gets me to another thing that Costco is doing that might just provide some protection for its shoppers coping with inflation. Yes, the $1.50 hot dog is nice, but I'm talking about precious metals. Costco started selling physical gold this past August and then physical silver in January. 

This is not a huge money-maker for the firm, but it is solidifying Costco's place as a haven for the budget aware consumer and further demonstrates the trust that Costco has earned in its relationship with its core members. Costco has been selling gold at a rough 2% above spot prices, and this is before a 2% cash back reward for executive members and a 2% cash back for members using their Citi C Cards.

This comes a week after Costco announced a new weight-loss program for members through healthcare provider Sesame that will include a video consultation with a weight loss doctor or specialist and a prescription if needed for a GLP-1 weight loss drug such as those manufactured by Eli Lilly LLY of Novo Nordisk NVO if appropriate. The renewable plan will cost $179 every three months.

Earnings

The firm reported its fiscal second quarter financial results in early March. An earnings beat on a revenue miss, but 5.7% revenue growth and 5.8% adjusted comparable sales growth. Costco will report its third quarter in late May. Wall Street is looking for EPS of $3.66 on revenue of $57.6B, which would be good for 7% revenue growth. Sixteen of 23 analysts that I know of have increased their projections for quarterly profitability over the past three months.

The Fundies

Over the past twelve months, Costco has generated $10.648B in operating cash flow and free cash flow of $6.201B. At last glance, the firm had a cash position of $10.321B and current assets of $32.146B. Current liabilities amounted to $34.688B, but $2.541B of that was in the form of unearned credit. As we know, that is not a financial liability. Adjusting for that unearned credit gets the firm's adjusted current ratio up to 1.00. Just barely. Still, a passing grade.

Total assets add up to $66.323B, while total liabilities less equity comes to $45.563B. The firm claims no goodwill or intangible assets, which we like. The firm only has $5.865B in debt, all of it long-term. We like that too. This is a sneaky strong balance sheet.

My Thoughts

Now that COST has traded almost 9% of its highs in early March, is it a "buy?" I'm starting to look at the stock in this way.

Readers will see that as COST lost both its 21-day EMA (exponential moving average) and its 50-day SMA (simple moving average), its relative strength has weakened considerably as the daily MACD (moving average convergence divergence) has fallen out of bed. 

Could the stock go lower? Of course. It's very difficult to pick a bottom. We see here that the stock has remained inside the Pitchfork model that I started in late May when the stock really started to accelerate.

That said, at the start of the overall rally in very late 2022 through the apex this past March, we see that a 38.2% Fibonacci retracement would show up around the $652 level. A 50% retracement gets the stock to its current 200-day SMA (simple moving average) at $610.

So, what do I think? I am not going to buy any right here at these levels. I watch. I expect tougher economic times in an inflationary environment could be a boost to this name. Should the stock retake its 50-day SMA, I think I will start to buy the name on momentum. Should the stock fail to take that level, I wait to see if a run is made at that 38.2% fib level. The June 21st $650 puts are currently paying about $6.35. That's food for thought.

Now, I have to get myself to my local Costco and see about these gold and silver bars.

At the time of publication, Stephen Guilfoyle was long TJX, LLY equity.