At the time of writing, car dealer network Sonic Automotive (NYSE:SAH) mathematically represents a case of good news and bad news. Good news, on an absolute basis, the 8% magnitude return on a year-to-date (YTD) framework for SAH stock aligns with the long-term annual average performance of the benchmark S&P 500 index. The bad news? That 8% trajectory currently moves in the opposite direction, as in below parity.
Nevertheless, because of the awful year we’ve had — particularly with global supply chain issues, geopolitical volatility and the Federal Reserve taking the monetary punchbowl away — SAH stock has a reasonable shot to pull off a positive return by the end of the year. Being 8% down, it’s going to take some work. However, it’s not 80% down, which gives investors hope.
Below are three factors to consider as we close out the third quarter and enter Q4.
‘Whataboutism’ Makes SAH Stock Look Good
I don’t typically like to engage in whataboutism, or the deliberate avoidance of a question or argument through a counterpoint that undergirds an accusatory element. For instance, suppose you want to solve food insecurity issues in an impoverished nation. A whataboutism would be, “Well, what about food insecurity in America?”
Taken to its extreme, whataboutism can be detrimental to public policy because, ultimately, nothing gets done. Therefore, I don’t want to focus too much on whataboutism for SAH stock. Still, that investors didn’t penalize Sonic Automotive compared to many other firms represents a critical insight.
The S&P 500 has shed 21% YTD. Compared to the other stocks mentioned in the top 10 best stocks for 2022 at time of writing, SAH stock features the least-damaging profile among the crimson-laden securities. In fact, only two companies — Bristol-Myers Squibb (NYSE:BMY) and AbbVie (NASDAQ:ABBV) — have offered positive returns so far.
This indicates the fundamentals do matter, and that segues into my next point.
Inelastic Demand Bolsters Sonic Automotive
Discretionary sentiment encompasses much of Sonic Automotive’s business profile. In other words, people don’t necessarily need to have the fastest and shiniest vehicle around. Thus, vanity may play a significant role in people buying more car than they need.
However, the need component still exists. So, irrespective of what whatever financial guru has to say, you can’t just not have a car in many parts of the U.S. Therefore, SAH stock enjoys inelastic demand at the baseline of the consumer economy.
Let me clarify. Of course, if economic pressures impose a severe enough framework, people will buy the least expensive car possible. That’s an obvious logical deduction. However, people still need personal vehicles, especially in areas that lack public transportation. Otherwise, the time-money component of getting from point A to point B would be too onerous.
Indeed, Sonic’s Q2 2022 earnings report demonstrates the power of this baseline inelastic demand. Per the accompanying press release, Sonic posted “All-time record quarterly revenues of $3.7 billion, up 9% year-over-year, all-time record quarterly gross profit of $588.8 million, up 15% year-over-year.”
And yet the data indicates Sonic could have sold more vehicles had it not been for manufacturing issues that contributed to lower inventory and higher prices. It’s something to keep in mind when thinking about SAH stock.
Q4 and the Return to the Office
Perhaps the most controversial aspect of the contrarian bullish thesis for SAH stock is the return to the office. Earlier, various business publications talked up the concept that work from home (WFH) represents the future. It might be, but I’d put my money on an eventual resumption of normal.
That’s not to say that WFH is guaranteed to be eliminated completely. However, once companies start recalling workers back to the office, they’ll need to drive. And considering that the average car in the U.S. reached a record age, folks will be looking to upgrade.
Over the long run, that’s a net positive for SAH stock, believe me.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.