Is Costco A Bargain After Its Recent Correction?

Costco (COST) has incurred a 17% correction since it peaked, about three months ago. Every correction of the stock throughout its history has proved a great investing opportunity. Therefore, the big question is whether the stock has now become a bargain.

The Reasons Behind The Correction

A part of the correction of Costco can be attributed to the correction of the broad market. Since the stock peaked, S&P has lost 12% due to fears of an economic slowdown and the possibility of a recession in 2019 or 2020.

While the broad market correction has certainly affected the stock price of Costco, half of the losses of Costco have materialized after its recent earnings report. In the third quarter, the retailer grew its same-store sales by 7.5% and its earnings per share by 19% over last year. Nevertheless, the market punished the stock with an 8% plunge on the day of its earnings release. The adjusted earnings per share of $1.61 were marginally lower than the analysts’ consensus of $1.62. Moreover, the operating margin shrank from 3.0% to 2.7%, with management admitting that it is facing increasing competitive pressure, not only from supermarkets, but also from Sam’s. As Costco already operates at razor-thin margins, the market fears that the heating competition in the retail sector may soon begin to have a strong negative effect on the bottom line of the company.

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