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4 surprising stocks Goldman Sachs thinks could triumph over inflation

If you are seeking stocks that could perform well during the inflationary environment the U.S. looks to be headed into as it recovers from the depths of the COVID-19 pandemic, Goldman Sachs suggests parking some money in auto parts retailers.

Yes, auto parts retailers.

The investment thesis is pretty straightforward. With mobility across the country picking up (see chart below) as people get vaccinated, cars will likely need more maintenance. That leaves auto parts retailers such as O'Reilly (ORLY), Genuine Parts Company (GPC), AutoZone (AZO) and Advance Auto Parts (AAP) in the enviable position of being able to pass inflation in everything from tires to car wax on to consumers and then post strong profits.

"In a highly inflationary environment, we like the auto parts space with its unique ability to pass-through higher costs to customers given the non-discretionary nature of the category," says Goldman Sachs analyst Kate McShane. "For instance, in 2019, telegraphed prices increases to offset cost pressures arising from tariffs provided an incremental benefit to same-store sales growth and most auto parts retailers cited between 150-300 basis points of tariff-related inflation."

McShane rounds out her bullish thesis on auto parts retailers by noting the main sector plays sport price-to-earnings multiples below historical averages. Of the four aforementioned auto parts retailers, AutoZone has the lowest forward price-to-earnings multiple of 18.7 times, according to Yahoo Finance Plus data.

Mobility is back on the move higher as people get vaccinated for COVID-19.
Mobility is back on the move higher as people get vaccinated for COVID-19. (Goldman Sachs)

As for which name McShane is most bullish on, that award goes to Advance Auto Parts in the wake of a recent analyst day. McShane made the rare Wall Street move of upgrading her rating on Advance Auto Parts to Buy from Sell.

"Our double tier upgrade — from Sell to Buy — is predicated upon (1) Advance Auto Parts improving profit and loss dynamics with 2-4% same-store sales per annum and 230-450 basis points of margin expansion by 2023; (2) cyclical recovery in do-it-for-me, where Advance Auto Parts has greater exposure vs peers; (3) a finally improving do-it-yourself story as its new private label and loyalty program appears to be resonating with customers; (4) improved capital allocation to shareholders; (5) the ability of the auto parts space to pass-through inflation; and (6) valuation that looks appealing vs history, especially in light of improving macro and company specific dynamics," McShane says.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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