Noise can be disruptive. It sometimes blocks people’s ability to see things clearly. “Amazon buying Whole Foods” has been one such disruptive news flow and an even stable company like Costco got hit quite badly by that news flow. But with acquisition now complete – it’s time to evaluate where Costco stock and the company stands in this new environment.
Here’s how Costco stock looked before acquisition (Weekly Chart): nice uptrending chart
Here’s what Amazon buying Whole Foods news did to Amazon in June-July 2016. It even slipped below 200 dma.(Daily Chart)
This is how the daily chart of Costco stock looks like right now:
If we simply go by Price Action: Costco stock looks like have found support at 150 levels and one can make an assumption that stock will hold 150 and rally. Here’s why
Costco Business model is brilliant and Amazon Whole Foods is going to have minimal impact on Costco
One of the most underappreciated competitive advantage: Company's ability to create Loyal customers.
"Loyal customers cost less to service"— Deepak Singh (@smarket) March 23, 2017
Costco makes all its money from membership fees. The company members are extremely loyal and the renewal rate exceeds 90%. That’s not all. Once you get in the store: Costco does not sell its product at premium price like Whole Foods and hence Whole Foods cutting price is not going to reduce Costco attractiveness among its loyal customer base
Costco membership renewal is 90%…just imagine…a business where you don't have to market…customers come to you year after year and pay
— Deepak Singh (@smarket) March 23, 2017
This is what Costco stock did
Costco rallied from 150-155 to 200 over following 6 months
This is what happened to Costco trade 12 months later
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers