Geoff Considine, Ph.D | Dec 29, 2021 05:08
Costco Wholesale (NASDAQ:COST), the membership warehouse chain with outlets worldwide, has had an enormous run-up over the past 12 months, with a total return of 48.8 ).
The market-implied outlook through 2022, calculated using options that expire on Jan. 20, 2023, exhibits more elevated probabilities of negative returns (the dashed red line is persistently above the solid blue line for a wide range of the most probable outcomes). The annualized volatility calculated from this distribution, 27.3%, is consistent with the mid-year outlook. With consideration of the expected negative bias, I interpret this market-implied outlook as neutral to slightly bearish.
The negative return side of the distribution has been rotated about the vertical axis (Source: Author’s calculations using options quotes from E-Trade)
The market-implied outlook for COST to the middle of 2022 is slightly bullish, but the view to early 2023 has shifted to be slightly bearish. The expected volatility is consistent and quite low for both periods.
Costco is widely admired and shareholders have been well-served. At the current high valuation, however, it is hard to be bullish.
The Wall Street analyst consensus is bullish, but the consensus 12-month price target is below the current share price. The market-implied outlook for COST to the middle of 2022 is slightly bullish, but the view to early 2023 is slightly bearish. The expected volatility is modest.
Considering the valuation, the high share price relative to the analyst price target and the longer-term market-implied outlook, I am maintaining my neutral rating on COST. It will not be surprising to see some near-term gains in the share price given the positive momentum and the slight bullish tilt in the market-implied outlook to mid-year, however.
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