Some stocks just don’t seem to get any respect. They continue to outperform the broader market, yet no one seems to believe the rally is real. That’s what we’re seeing with auto parts kingpin, AutoZone, Inc. (NYSE: AZO).
The numbers are impressive. Five-year earnings growth is comparable to that of Microsoft Corporation (NASDAQ: MSFT), while return on capital is better than Apple Inc. (NASDAQ: AAPL) over the past five years. And AZO’s P/E is considerably lower than its industry peers. Yet nobody seems to notice. Trading volume has been declining steadily for the past year.
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The company reports earnings Tuesday before the open. The consensus calls for a profit increase of 14% from a year ago, which is less than the 22% average gain of the past four quarters. Not a lot expected there.
Our sentiment indicators are flashing a heavy pessimistic leaning. The put/call ratio has spiked to an annual high, while the short interest ratio sits above a robust 6. And analysts have refused to jump on the bandwagon, as fewer than half rate the stock a “buy.” In short, there’s plenty of pessimism to unwind into buying.
On the charts, AZO is up 35% off its November low. The S&P 500 (SPX) is up around 8% in the same time period. After pulling back to its 50-day moving average with the market’s pullback in early May, the shares have found strength at the 20-day moving average. The next stop on the upside is the all-time high at $188, reached late last month.
Even if earnings don’t help AZO, the stock has strong fundamentals to keep the momentum intact. And with plenty of pessimism available, the rally has plenty of fuel and room to run.
Look at an AZO June call with a strike price in the $180-$190 range to capture the continued upside before the crowd catches on to AZO’s potential.
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