As we've been discussing throughout the past six months, a range-bound market means you're likely better off moving in and out of certain stocks and sectors as they prove timely. Buy-and-hold appears dead for now, although few have the ability to profit from very short-term trades either.
Costco (Nasdaq: COST) highlights the value of a "mid-term trade." In just six weeks, investors have made about +25% from this investment. Yet Wednesday's quarterly report from this retailer tells us it's time to "sell on the news."
Whenever you see a stock make a solid move as Costco has, it leads you to wonder if business is trending well ahead of expectations. That's why it makes sense to hang on and see how quarterly results fare. I've noticed solid upward moves in four other retail pays I track; Best Buy (NYSE: BBY), Leapfrog Enterprises (NYSE: LF), Office Depot (NYSE: ODP) and Casual Male (Nasdaq: CMRG). Is business improving for these firms, or is the recent spike in Costco and these other companies' shares simply due to a re-rotation back into retail?
Wednesday's dismal ADP jobs report, which is a precursor to Friday's monthly employment report from the Labor Department, should give pause. So the retail trade may be premature and it may be time to book profits in recent retail gainers. That's what investors are doing with Costco, which is pulling back -1.5% today after running from $60 to $65 in the second half of September.
Costco's quarterly sales slightly lagged estimates (when you back out the impact of gas price changes), although per share profits were slightly better than analysts had expected. And judging by the numbers, the recent rally makes this stock now look fully valued. Thanks to the tepid economy, Costco's sales are likely to only rise +6% to +7% in the fiscal year that began last month. Profits are likely to grow at low double-digits. Yet shares trade for about 20 times projected fiscal 2011 profits and are really no bargain.
Action to Take --> Whether it's the broader stock market or an individual stock, I'm always on the lookout for a sideways chart. When a stock is rising, buyers outnumber sellers. When a stock starts to move sideways, that's a sign that either sellers are stepping in or buyers are petering out. Either way, it often results in the next move being a downward one, as sellers eventually overwhelm buyers. I'm not predicting that for Costco specifically, but you may want to use this as a signal to take profits if you have secured a solid run in an investment.
As noted above, select retail stocks have had a nice run, though it is unlikely they are reflecting improving consumer spending. On Wednesday and Thursday, a wide range of retailers will weigh in on how they fared in the back-to-school season. How the sector trades in response will be telling. If Costco is any indication, investor sentiment may be cooling and it may be wise to book any profits you've had on "mid-term trades" like this one.