Sellers swarmed Costco shares Thursday after the company reported a slowdown in November sales. But it’s been a different story for LULU shares, which have attracted buyers amid expectations for another strong earnings report.
Costco (COST) and Lululemon (LULU) are next on the income list along with Broadcom (AVGO), which rose in strong volume above its Wednesday 200-day moving average. Semiconductor stocks were among the biggest gainers on Wednesday after Federal Reserve Chairman Jerome Powell reiterated the Fed’s intention to slow the pace of rate hikes.
Costco Stock has the major support level
Costco shares crashed below the 200-day line on Thursday after the company reported $19.17 billion in revenue in November, up 5.7% year-over-year. But that was a slowdown in growth from 7.7% in October and 10.1% in September. Investors were also shocked by a 10% drop 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% increase in quarterly profit. Sales increased 15% to $72.1 billion. But margins were under pressure, hurt by higher freight and labor costs. The gross margin of 10.2% contracted from 10.9% in the same period a year ago.
Costco will report earnings Thursday after the close. Zacks’ consensus estimate is that adjusted earnings will increase 39% to $4.12 per share, with revenue up 9% to $55.06 billion.
Earnings View: LULU, AVGO, OLLI
LULU shares surged on Sept. 2 after the company reported another quarter of strong revenue and earnings growth. Earnings rose 33% to $2.20 per share. Sales increased 29% to $1.87 billion. Direct-to-consumer sales increased by 30%, accounting for 42% of total sales.
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, demonstrating the strength of our multidimensional business model.”
In April, Lululemon announced plans to double its revenue from $6.25 billion in 2021 to $12.5 billion in 2026. The company also aims to double its revenue from men and digital and quadruple its international revenue from 2021.
The results are expected at the end of Thursday. Earnings are expected to increase 20% to $1.95 per share, with revenue up 24% to $1.8 billion.
Also in retail Ollie’s bargain outlet (OLLI) reports Wednesday before the opening. The stock made big gains after breaking above a trendline on Nov. 22. In the last reported quarter, sales increased 9% to $452.5 million. For the current quarter, sales are expected to increase 12.5% to $431.4 million.
Broadcom also reports late Thursday in the chip sector. The company’s impressive suite of semiconductor products accelerates the movement of data in data center, telecom, enterprise and embedded network applications.
The stock barely budged on Thursday after a bullish gain on Wednesday, a sign of strength and support.
Revenue growth at Broadcom has accelerated for three consecutive quarters, from 16% to 23% to 25%. Revenue for the current quarter is up 20% to $8.9 billion.
Options trading strategy
A basic strategy for trading options around income – using call options – allows you to buy a stock at a predetermined price without taking on much risk. Here’s how the options trading strategy works and what a recent Home Depot option trade looked like.
First, identify the top-rated stocks with a bullish chart. Some may be settling into a solid base early on. Others may have already broken out and are getting support at their 10-week moving average for the first time. And a few might trade tight near highs and refuse to give up much ground. Avoid extensive supplies that are too far past the correct entry points.
Costco stock could be a candidate for a call option trade, though the technical picture has weakened following Thursday’s sell-off. Still, Costco stock is making its way to 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 certain price.
You earn a profit when the stock falls below the strike price with a put option.
Check Strike Prices
Once you have identified an income configuration for a call option, check the strike prices on your online trading platform or on cboe.com. Make sure the option is liquid, with a relatively small 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 share price at that 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. Short term due dates will have cheaper premiums than those further afield. Buying time in the options market incurs higher costs.
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This option trading strategy allows you to benefit from a bullish earnings report without taking too much risk. The risk is equal to the cost of the option. If inventory is less than profit, the most you can lose is the amount paid for the contract.
Costco stock option trading
Here’s what a recent call option trade looked like for Costco.
When Costco shares traded around 504, a slightly out-of-the-money weekly call option with a strike price of 505 (expiry December 16) came with a premium of about $14.65 per share per contract, or 2.9% of the underlying share price at the time.
One contract gave the holder the right to purchase 100 shares of Costco at 505 per share. The most that could be lost was $1,465 – the amount paid for the 100-share contract.
Taking into account the premium paid, Costco would need to move past 519.65 for the trade to make money (505 strike price plus $14.65 premium per contract).
A put option for Costco could also make sense. With the same strike price with the same expiration date, the premium was about $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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