Being a great investor takes an eye for spotting trends in the macro economy. One such trend that has been playing out is that new auto sales are slower than anytime since 1982, and U.S. automakers have been on the brink of collapse for at least the last three months. The government has rescued the Big 3 from bankruptcy already and will likely continue until sales improve substantially. One beneficiary of these slowdown in auto sales have been the replacement parts vendors, in particular Advanced Auto Parts (AAP). AAP had a miserable October and November of 2008, just like about every stock in the market, but since then the stock has rallied 36% since the beginning of December and nearly 50% from the October lows. Not too bad considering the broad market, in this case the S&P 500, has languished down 12% and 15% during the same time periods. Fox Business discussed auto parts makers at length this afternoon:
“… As long as we have cars, the opportunity here is at Advance Auto Parts. Obviously with the economy as poor a shape it is, people looking to save dough. It gives people an opportunity to go out and work on their cars…people are holding on to their cars longer so they need information, whether it’s books or online help which the folks at Advance Auto Parts also provide.”
While you have to admire the run-up that Advance Auto Parts has been able to achieve in such a rough market, we believe that this trend has about run its course. We are not saying that new cars are going to start flying off the lot, but as the economists at First Trust Advisors often point out, “autos selling at an historic low replacement rate of 25 years (meaning it would take 25 years to replace all the cars on the road if the current selling pace was sustained), we foresee a trend increase in sales in 2009.”
Furthermore, the rapid appreciation in AAP has not yet been supported by underlying fundamentals such as revenue and cash flow. The fourth quarter results were better than expected, but profits had slipped 30%. This is why we have downgraded AAP to an Overvalued rating as of this week. When a trend is being discussed as doctrine on TV, it might mean that you have missed the chance and better to go looking elsewhere.