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Trump tariffs won't crush U.S. auto parts retailers

Brian Sozzi

President Donald Trump has proven successful of late in at least two areas.

First, ratcheting up concerns on the outlook for U.S. auto parts suppliers amid proposed tariffs of up to 25% on Mexico imports as a means to stem the immigration crisis. Remember, Mexico accounts for the largest exporter to the U.S. of auto parts. And secondarily, stoking fears of a garden variety U.S. recession amid a harder line on trade with China.

Even in the face of those concerns, auto parts retailers may be a safe-haven trade for investors. Go figure, right?

“For auto parts retailers, they get those auto parts a little further down the line [supply chain]. So they are not importing directly that much from Mexico. By the time it gets to the retailer there is a little bit less of an impact,” explained Bank of America Merrill Lynch analyst Liz Suzuki on Yahoo Finance’s The First Trade.

Sukuki’s bullish investment thesis on auto parts retailers such as Autozone (AZO), O’Reilly Automotive (ORLY) and Advance Auto Parts (AAP) is focused primarily on pricing power no matter of the economic backdrop. In many cases, even during a recession (like the one Wall Street is currently fretting about) if one’s car breaks down they will have to get it fixed.

Meanwhile, more Uber and Lyft cars driving around — and potentially autonomous ones from each soon — could increase wear and tear and send drivers off for replacement parts. The Automotive Aftermarket Suppliers Association (AASA) projects that big trends such as new mobility services and autonomous cars could lead to an additional 2 trillion global miles driven by 2040.

“The great thing about auto parts retailers is that they are relatively defensive. These are companies that can pass through cost increases pretty well. This is a non-discretionary category. So no one wakes up one day and says I want to buy a spark plug, they need it to keep their car going.”

Suzuki has data to flesh out her optimistic call on the space.

During true bear markets, per Suzuki’s analysis, auto parts retail stocks have beaten the S&P 500 in six out of six bear markets (including September 2018 to December 2018) by an average of 34 percentage points. During the past month of market turbulence, to this point, the stock prices of Autozone, O’Reilly Automotive and Advance Auto Parts have nicely outperformed the Dow Jones Industrial Average and S&P 500.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi.

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