Will New Locations Keep The Costco Rally Going?

One of the few bright spots in the U.S. retail sector in 2017 has been Costco Wholesale Corporation COST.

The stock is up 13 percent in the past six months, and investors are looking forward to a massive $7 special dividend that will be paid out on May 26 to shareholders as of May 10.

While other major retailers are closing stores by the hundreds under the weight of increasing e-commerce competition from Amazon.com, Inc. AMZN and others, Costco may have figured out a winning retail strategy in the Amazon era. After opening 32 new stores from mid-2015 to mid-2017, Costco has plans to open another nine locations by the end of 2017.

Tematica Research’s Chris Versace recently explained the appeal of Costco on Benzinga’s PreMarket Prep show.

“I have been a big, big fan of Costco for some time,” Versace said.

Related Link: Breaking Down Costco's $7 Dividend

Why Celebrate Costco?

“There’s a couple of pieces to Costco. One, I really like their push into fresh food that keeps people coming back on a more frequent basis. They’re also pushing heavy into natural and organic products because that’s where consumers are spending.”

But while product offerings are certainly important, Versace said Costco also has a unique cash cow.

“The real area they make money on is on the membership fees. As they continue to open more locations, they get more members, they get more high-margin membership fee revenue and that really drives their cash flow,” he explained.

Because Amazon typically doesn’t ship in bulk, Costco has maintained its niche within the retail sector as well. If Costco continues opening more stores, investors can expect its cash flow and its share price to keep trending in the right direction.

Joel Elconin contributed to this article.

PreMarket Prep is a daily trading ideas show that focuses on technical analysis and actionable short term trades. You can listen to the show live every morning from 8–9 a.m. ET here, or catch the podcast here.