Costco's 'parabolic charts only end one way ... badly,' says top market watcher

Costco just got cut.

Costco shares fell on Friday after Wells Fargo downgraded the stock to "market perform," citing the stock's lofty gain in the past year.

"While COST remains one of the highest quality companies within consumer and near-term results should be positive, we can't help but think this may be as good as it gets," the firm's analysts led by Edward J. Kelly wrote in a note to clients, knocking the stock down by 2 percent.

Now, some strategists say the stock is simply too rich at current levels to buy in, with a price-earnings ratio of a little over 30 times forward earnings — and the technicals are equally bleak to some.

"Parabolic charts only end one way … badly," Craig Johnson, chief market technician at Piper Jaffray said Friday.

"It looks to be short-term extended, ahead of itself, and I think this stock could correct 15, 20 percent, and by the way, you wouldn't even be back up to its up-trend support line. So, not a buyer of the stock here. I'd be waiting for a pullback, and I'd buy it 15 percent lower, at a minimum," Johnson said on Friday on CNBC's "Trading Nation."

Others echo this sentiment.

The fundamental picture for the wholesale retailer is strong, said Gina Sanchez, CEO of Chantico Global. She noted that the company has the potential to thrive even in the event of an economic downturn, since the price point is relatively low. She's still not a buyer at this point.

"The problem with Costco, the fly in the ointment, is they are trading at over 30 times forward earnings. That's pretty pricey. There are other ways to get exposure to that theme that are lower priced," Sanchez said, recommending Target as a potential big-box name for investors to consider, with a multiple of about 16 times forward earnings.

Costco shares closed a little over 2 percent lower on Friday, at $235.38 per share.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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