Markers point retail and professional traders to the right places to consider an investment. Today, a specific branch of the manufacturing sector has attracted much of the market's wild-swinging attention, bringing you the highest odds of squeezing a decent profit in the coming months. But more on why this is the case in just a bit.
You will soon find out why the automotive industry could be the one to draw all the investment dollars into it shortly, answering the calls that have been made explicitly by the recent developments in AutoNation Inc. (NYSE: AN) stock lately. The industry saw a bit of a dark spell during the United Auto Workers (UAW) strikes in the past two quarters and rising car loan delinquencies, but today, that changed.
There aren't a lot of competitors who could propose the type of discount and upside that AutoNation brings you today, not O'Reilly Automotive Inc. (NASDAQ: ORLY) or AutoZone Inc. (NYSE: AZO). Your job today is to translate the market's encrypted message regarding where AutoNation stock is today and what this means for the stock's future price, all in benefit to your portfolio should you consider it a worthy addition.
Cog in a machine
Professional traders at the big banks, the ones operating at firms like The Goldman Sachs Group (NYSE: GS), tend to follow a systematic process to find stocks to place their money into.
You can refer to this initial stage as "top-down" analysis, which seeks to break down the trends in the economy and specific industries, finding outliers with high probabilities of a significant move. You, too, can follow in their tracks by looking at one such economic indicator, the ISM manufacturing PMI index.
You would want to look specifically to the transportation equipment industry, which includes the wholesale of auto parts, where AutoNation shines. During November and December in the past quarter, this industry was in contraction, only to break into newfound expansion in January to start the year.
Likewise, according to the employment situation report, the motor vehicle and parts industry added 3,100 jobs in the past month, while the United States economy added 353,000 jobs.
The same analysts from Goldman openly expressed their expectations of seeing a breakout in the manufacturing sector this year; you can check out their thesis in this 2024 macro outlook report.
Sponsored by potential interest rate cuts from the Federal Reserve (the Fed) this year, a new money cycle could also spark activity in the sector. Even executives inside the respondent section of the PMI said the industry is "looking to rebound" after the adverse effects experienced from the UAW strikes subside.
You're with a winner
Understanding that AutoNation has underperformed AutoZone and O'Reilly by as much as 12% over the past 12 months is only half the story. The fact that the stock needs to catch up is only one of the many driving buyers to sneak into the stock for the long side.
Analysts may still be hanging on the blues of the past, as they still project an earnings per share decline of 12.7% over the next 12 months, all while AutoZone and O'Reilly expect a respective advance of 9.5% and 10.6% for the coming year.
The fact is, whale insider investors are bidding the stock up in other places, betting on more optimistic outlooks to come from analysts. Markets cannot hide the evidence that you can find in how these stocks are priced, particularly their price-to-book ratios, which show how willing markets are to pay for each dollar of equity into the business.
At 2.8x, AutoNation commands a premium of 88% over its competitor, AutoZone.
O’Reilly's debts are more significant than its equity, so you can't even value this stock in that sense.
Analysts may also be hinting at their new views on the stock, realizing that its price action gap on top of the way markets perceive its value are two big enough reasons to assign a $175.10 a share price target, calling for a 13.8% rally from where the stock trades at today.
O'Reilly analysts only see a 2.9% upside in their targets, while AutoZone's $2,857 price target offers you a 5.7% upside.
