The consumer is moribund, unemployment is sticking at 9 percent and non-discretionary costs for consumers are at or near all-time highs. These facts are all undeniable, even to contrarians. Where's an investor to turn in these times of consumer strife?
Retail, according to John Lawrence of Morgan Keegan. Don't scoff and click to the next article; Lawrence is looking to take advantage of economic headwinds by investing in the trend of cost-cutting consumers learning to do it themselves when it comes to taking care of their cars. As noted previously on Breakout, the average age of cars on American roads has never been higher -- 11 to 12 years, by Lawrence's estimation. Though this trend is undeniably a function of higher manufacturing standards leading to longer lives for cars, even the best-built product needs an occasional maintenance. That confluence of trends causes Lawrence to greenlight automotive aftermarket retailers.
Companies such as AutoZone (AZO) and Monroe Mufflers (MNRO) recently sped past earnings estimates and have been racing higher over the past year, with gains of 55 percent and 30 percent, respectively. The companies represent a David and Goliath spread in terms of size, with AutoZone weighing in at 12 times the market cap of Monroe. The implied growth potential of the companies is reflected in the earnings multiples, as AZO is trading at a relatively inexpensive 16 times earnings vs. Monroe's 23 times P/E. For what it's worth -- and the value is debatable -- earnings growth rate estimates are also much higher for Monroe vs. AutoZone.
It often pays to stick with a societal trend in retail stocks. The after-part industry is rocking, as evidenced by gains not just in AZO and MNRO but also companies such as Goodyear Tire (GT) and a few of the used car dealers such as Penske (PNK) and Sonic (SAH). Retail may not be sexy (though the creepy/ sexy Abercrombie and Fitch (ANF) is at 52-week highs), but it can make you money. Check out the video and see if it doesn't inspire you to buy some stocks with that next muffler purchase.
(Disclosure: I own stock in PNK and SAH.)
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- Abercrombie and Fitch
- Goodyear Tire
- David and Goliath