The market has been up and down these last few summer months — ducking and dodging curveballs like the Greece crisis and the Chinese yuan devaluation, not to mention typical summer doldrums. One of the sectors that’s helped amid these swaying circumstances is retail, which has benefited from ever-increasing employment opportunities, giving U.S. consumers a bit more money in their wallets to play around with.
While wage gains haven’t been as robust as we would all like to see, employees nationwide are making a lot of noise — and if they’re loud enough, we just might see the hike trends visible in places like California begin to spread across the rest of the country.
I’ve been keeping a close eye on key retailers, and one area in particular that has already paid off in my GameChangers newsletter is vehicle sales, which are on pace to surpass 17 million this year for the first time since 2008. A standout example here is O’Reilly Automotive (ORLY), which has grown steadily despite the market’s wobbles. The stock has been in a solid uptrend, a reflection of both the strong sector in which it operates as well as the Street’s respect for the company, which continues to gain market share through loyal customers and high-quality automotive parts.
One of the leading players in the auto industry, ORLY splits revenues between “do it yourself” and “we’ll do it for you” strategies. The latter may be particularly critical for growth, as increasingly complex automobiles are making it harder for even the most determined DIYers to fix cars. ORLY’s dual market approach is what sets the company apart from its competitors, as it sells to both individual car owners and professional repair shops.
The stock has traded steadily following its impressive second-quarter results on July 29. Earnings of $2.29 a share (versus $1.19 a share a year ago) came in 3 cents above expectations, and revenue growth of 10% was also better than the estimated 8.2%. ORLY has just begun to stretch its operations in the Northeast, and with solid comparable store sales growth of 7.2%, further development there should help drive continual growth.
During the conference call, management raised 2015 earnings guidance by 17 cents to $8.59-$8.89 a share. For the whole year, guidance was raised 39 cents a share, despite a $19 million litigation charge that took away 13 cents in earnings.
Those strong results helped push the shares to new all-time highs just last week. The question now is how much upside is left, and I believe further gains are going to get harder to come by. The stock now looks closer to fully valued at 25 times forward earnings per share, which actually seems a bit high to me given that ORLY is a company that drives much of its earnings growth through share buybacks. This was among the reasons I advised my subscribers to lock in their 13% gain in a short three-month period.
Going forward, I also expect ORLY will face some tough retail comparisons for 2016. And when that time comes, we could see sellers step in and drag the price back down on any stumbles or sector weakness. It’s also important to account for the impact of changing interest rates in the coming months. While it’s possible the Federal Reserve won’t raise rates for a while, ORLY will be vulnerable whenever we see a hike.
No matter what the coming weeks and months bring, the smart move here was to protect our quick profits and put that money into stocks that are ready to work for us today.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
