Costco Stock Slammed Ahead Of Earnings; Lululemon, Ollie’s Bargain Outlet, Broadcom Also Set To Report

Sellers swarmed around Costco stock Thursday after the company reported a slowdown in November sales. But it’s been a different story for LULU stock, which has been attracting buyers amid expectations for another strong earnings report.

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Costco (COST) and Lululemon (LULU) are next up on the earnings docket, along with Broadcom (AVGO), which surged above its 200-day moving average Wednesday in strong volume. Semiconductor stocks were among the top gainers Wednesday after Federal Reserve Chair Jerome Powell reiterated the Fed’s intention to slow down the pace of interest rate hikes.

Costco Stock Holds Key Support Level

Costco stock crashed below its 200-day line Thursday after the company reported November revenue of $19.17 billion, up 5.7% year over year. But that was a slowdown from 7.7% growth in October and 10.1% in September. Investors were also spooked by a 10% decline in e-commerce sales, much worse than October’s 0.7% loss.

The retailer fell sharply on Sept. 23 after the company reported an 8% rise in quarterly profit. Revenue increased 15% to $72.1 billion. But margins were squeezed, hurt by higher freight and labor costs. 10.2% gross margin shrank from 10.9% in the year-ago period.

Costco reports earnings Thursday after the close. The Zacks consensus estimate is for adjusted profit to rise 39% to $4.12 a share, with revenue up 9% to $55.06 billion.

Earnings Watch: LULU, AVGO, OLLI

LULU stock gapped up on Sept. 2 after the company reported another quarter of strong top and bottom-line growth. Profit jumped 33% to $2.20 a share. Revenue increased 29% to $1.87 billion. Direct-to-consumer revenue rose 30%, making up 42% of total revenue.

Commenting on the results, CFO Meghan Frank said: “Despite the challenges around us in the macro-environment, guest traffic in our stores and on our e-commerce sites remains robust, which speaks to the strength of our multidimensional operating model.”

In April, Lululemon revealed plans to double its 2021 revenue of $6.25 billion to $12.5 billion by 2026. It also aims to double men’s and digital revenue, and to quadruple international revenue relative to 2021.

Results are due late Thursday. Profit is expected to rise 20% to $1.95 a share, with revenue up 24% to $1.8 billion.

Also in the retail sector, Ollie’s Bargain Outlet (OLLI) reports Wednesday before the open. The stock has been holding gains well after a breakout over a trendline on Nov. 22. In the latest reported quarter, revenue rose 9% to $452.5 million. For the current quarter, revenue is expected to increase 12.5% to $431.4 million.

In the chip sector, Broadcom also reports late Thursday. The company’s impressive semiconductor products line speeds up the movement of data in data centers, telecom, enterprise  and embedded networking applications.

The stock barely budged Thursday after a bullish gain Wednesday, a sign of strength and support.

Revenue growth at Broadcom has accelerated for three straight quarters, from 16% to 23% to 25%. Revenue for the current quarter is seen rising 20% to $8.9 billion.

Options Trading Strategy

A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a recent Home Depot option trade looked like.

First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week moving average for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.

Costco stock could be a candidate for a call-option trade, although its technical picture has weakened after Thursday’s sell-off. Still, Costco stock is making a stand at the 500 level and holding above its 50-day moving average. Costco bears could also consider a put option.

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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.

Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.

You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.

Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.

Costco Stock Option Trade

Here’s what a recent call option trade looked like for Costco.

When Costco stock traded around 504, a slightly out-of-the-money weekly call option with a 505 strike price (Dec. 16 expiration) came with a premium of around $14.65 a share per contract, or 2.9% of the underlying stock price at the time.

One contract gave the holder the right to buy 100 shares of Costco stock at 505 a share. The most that could be lost was $1,465 — the amount paid for the 100-share contract.

When taking the premium paid into account, Costco would have to rally past 519.65 for the trade to start making money (505 strike price plus $14.65 premium per contract).

A put option for Costco could also make sense. Using the same strike price with the same expiration, the premium was around $15.

One contract  gave the holder the right to sell 100 shares of Costco at 505. That means Costco would have to go below 490 for the trade to make money.

Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight

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