In “One Up on Wall Street,” Peter Lynch told investors that a key principle for finding winning stocks is selecting companies whose businesses are not particularly sexy or exciting.
Today’s pick operates in what some may consider a “boring” market segment, but the stock is exciting to me because it has a strong chart and excellent fundamentals.
Advance Auto Parts (NYSE: AAP) is North America’s largest automotive aftermarket parts provider.
With cars and trucks lasting longer than they used to, consumers put increased dollars into maintaining their existing cars, spurring demand for auto parts.
The automotive aftermarket industry consists of companies that manufacture, distribute, sell and install car and truck equipment and accessories, like batteries, motor oil, stereos, etc. In 2010, this market totaled about $190 billion, according to the U.S. Department of Commerce. By 2013, it ballooned 67% to $318 billion.
That growth looks set to continue. According to research by financial information company Sageworks, auto parts were one of the fastest growing retail segments of the past 12 months.
Advance Auto Parts currently operates more than 5,200 company outlets, over 100 Worldpac branches, and serves about 1,400 independently owned Carquest stores. The retailer primarily caters to the “do it for me” crowd through commercial repair shops, as well as “do it yourself” (DIY) customers through retail outlets.
Industry consolidation is spurring growth. In 2013, Advance Auto Parts and its three main competitors, O’Reilly Automotive (NASDAQ: ORLY), AutoZone (NYSE: AZO) and Genuine Parts (NYSE: GPC), controlled only 28% of the market, leaving room for acquisitions.
In January, Advance Auto Parts completed a $2.1 billion acquisition of General Parts International, owner of the Carquest chain. The deal gave Advance expanded repair shop capabilities and a higher store count. Management expects the move to bring in $190 million in revenue over the next three years. At the same time, they believe it can achieve $160 million in cost savings in part by streamlining its distribution chain.
The company is scheduled to report fourth-quarter and full-year 2014 results on Feb. 12, and analysts appear optimistic.
For Q4, they estimate revenue will jump 62% year over year to $2.3 billion and earnings will surge 119% to $1.47 per share. For the full year, 52% sales growth, to $9.9 billion, is expected to translate into a 45% increase in profits to $7.71 per share.
The chart shows AAP is in a strong uptrend.
Shares began a major uptrend off the December 2012 lows near $70, more than doubling to date.
In October 2013, the stock jumped 20% in one trading week, which was the beginning of an accelerated uptrend. Since then, AAP’s ascent has been marked by periods of consolidation.
The march higher took the stock to what was then an all-time high just below $140 in early September. But by the end of the month, shares pulled back to support near $128.
After hugging the accelerated uptrend line for several weeks, AAP bullishly broke out, surging past $140 resistance. This level now marks important support.
In early November, shares hit an all-time high just below key round number resistance at $150. But when the company reported strong third-quarter results, slightly beating expectations, but lower-than-expected guidance, the stock declined. It temporarily dipped below support before stabilizing.
A narrow rectangle has begun to form with support near $140 and resistance near $150. Due to the company’s strong fundamentals, I expect the pattern to resolve bullishly. If that happens, we can expect a quick move higher.
According to the measuring principle for a rectangle, shares could potentially reach a minimum target of $160.20 ($149.84-$139.48 = $10.36; $10.36+$149.84 = $160.20). However, since there would be no overhead resistance, I believe shares will move even higher. I’m setting my target at $169.95, which is 17% above current prices.
Risks to consider: Despite the company reporting third-quarter results that exceeded expectations, shareholders seemed disappointed the numbers weren’t even better and sent the stock briefly lower. If fourth-quarter and full-year results fall below heightened expectations, the stock could see a similar decline. However, because the company has a strong growth profile, any short-term pullbacks should result in rapid rebounds.
Recommended Trade Setup:
— Buy AAP at the market price
— Set stop-loss at $134.85
— Set price target at $169.95 for a potential 17% gain by mid-2015
Note: Over the past year, one little-known indicator spotted 29 stocks right before they jumped double digits in a month. Now, it’s tagged another stock as an immediate “buy.” In fact, it’s flashing the same kind of buy signal as a stock that rose 266% in a year. Get its name here along with all the details on this powerful indicator.
— Melvin Pasternak