AutoNation, Inc. (AN) may be a short-term winner, even if the market continues to flatten out or decline this quarter.

On the surface, the company presents itself as an auto retailer for new and used cars with primary markets in Florida, California and Texas. Geographic concentration is a risk now that the oil sector has slowed down; however, we think there is an underappreciated opportunity in the short-term precisely because of those risks.

It is true that most of AutoNation’s revenue is from car sales, with 57% of revenue coming from new-car sales and another 23% from used-car sales. But the earnings picture is where it gets more interesting. Just over 40% of AN’s earnings are from “Parts and Service.” That slice of the pie comes from a mere 15% of their total revenue.

The growth opportunity in Parts and Service is due in large part to the fact that consumers are likely to service their cars where they bought them if a warranty was included with the purchase. Additionally, it is becoming more difficult for DIYers and small repair shops to deal with the high-tech equipment and computers on modern cars. This has reduced some of the competitive threat for AN and opened up new opportunities.

If the economy in California, Texas and Florida remains stable in the aggregate (despite the slowdown in energy), AutoNation is well-positioned to continue selling cars at their current breakneck pace. This makes them an attractive long position, considering that their forward P/E ratio is 13, which is 30% lower than the average for the S&P 500.

Despite low value ratios, some investors have been cautious about AN’s trend, because auto-sales can be cyclical in nature. That factor may help to explain why AN looks a little undervalued compared to the average among consumer-products companies, which have an average P/E ratio of 30.

There isn’t much AN can do to mitigate all of the cyclical auto-sales risks…and that issue could become a bigger problem if the U.S. economy struggles in 2015–2016. However, in the short term, we expect large investors to consider the Parts and Service segment of the earnings pie as a hedge against some of that uncertainty.

If the economy flattens or declines, consumers are more likely to service old vehicles than to purchase new. AN’s economy of scale on that side of the business puts them in a very powerful competitive position.

We don’t expect the company to be immune from a drawdown; what we are really anticipating is that investors are going to shift further towards these kinds of companies before the economy has a chance to contract. AutoNation’s focus on diversified cash flow makes them attractive as investors shift from more speculative issues.

From a technical perspective, AN drew down to support following a stellar earnings report at the beginning of February. As you can see in the chart below, February’s gap lines up with the July 2014 highs, before a disappointing earnings report (as energy prices were near a high) sent the stock lower. We expect February’s gap range to act as support and like the idea of new long positions following a break back above $61.

Auto Nation (AN): Chart courtesy of eSignal

Conclusion

We like the prospects for a long position on AN. The integrated hedge of the high-margin Parts and Service segment should attract new buyers in the short term as worries about economic contraction persist. The February 2015/July 2014 gaps should provide technical support for the price — but we suggest waiting for a confirmed break above $61 before opening a new position, considering recent price volatility.

InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.

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