Trade of the Day: AutoNation, Inc. (AN)

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Automakers rallied big last week on news that sales were not as bad as expected. The “good news” included a note that Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) have sent fewer cars to the rental agencies, which is a positive shift and was probably the rally’s proximate cause.

However, there are problems in the industry that have not been reduced and have created an interesting opportunity. Much of the new progress made by the automakers has been at the expense of other companies in the value chain — including AutoNation, Inc. (NYSE:AN). The number of cars coming off-lease this year is extraordinary and isn’t going to change. The flood of new inventory and stiffer competition from new car sales is a problem for used car dealers.

We think AN’s rally last week with F and GM is counter to the underlying fundamentals and that investors will sell the stock at resistance. We expect an initial price target of $39-40 per share before earnings later this month.

Use a limit order to ‘buy to open’ the AN August 41 Puts (AN170818P00041000) for a maximum price of $1.30. 

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