It goes without saying that this market remains a stock picker's market. Select the wrong stock, and there's a 30-40% haircut up ahead; select the correct stock, and you're positioned for the recovery with modest downside exposure. For a chance at the latter, consider O'Reilly Automotive (NYSE: ORLY).Nothing fancy schmancy about the O'Reilly value story: it's the third largest automotive aftermarket parts supplier (alternators, starters, fuel pumps, brake shoes, brake pads, filters, etc.), with 3,285 stores in 38 states.
And how might one characterize the auto parts sector? Well, it's not nearly as cyclical as other auto segments, and during recessions, auto parts companies usually do well because – you guessed – people who can't afford to buy a new car maintain their current used car better, because they know they may be driving it for several more years: in many cases, it may be their only transportation form. The First Call FY 2009/FY 2010 EPS estimates for ORLY are $1.95 to $2.38.
In general, analysts see a 25-35% sales increase for ORLY in FY 2009, following a 42% surge in FY 2008. Increased efficiency by O'Reilly's distribution centers is another positive. O'Reilly's p/e of 24 is above average, but given the company's growth prospects, it's comfortable to add shares right here.
Stock Analysis: O'Reilly Automotive is a moderate-risk stock. Consider buying a 25% position in ORLY now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your ORLY position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $18.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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