Tuesday, January 4, 2011

AutoZone (AZO) - Auto Parts Sector in Play

AZO is trading $258.22, down 3.8% with IV30™ up 17.5%. The LIVEVOL™ Pro Summary is below.


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I never thought I'd say this, but the auto parts industry looks interesting right now. I found AZO because its vol is up so much today.

Here's the industry low down in super fast mode. MUCH props to MotleyFool.com for this great article.

For the automotive replacement parts industry and parts retailers the road has been much less bumpy than most industries over the last couple of years. As consumers worried about having enough to spend on the bare essentials, purchasing a new car was the least of their priorities. The average age of vehicles on the road has continued to increase, as has the mileage driven. In addition, the automakers' troubles resulted in thousand of dealership closings that has sent many drivers in need of repairs to independent garages that the parts retailers service.

These favorable trends have helped the replacement parts sector become one of the best performing throughout the recession and in the slow recovery currently taking hold.

Is the trend your friend?
The recent continuation of these trends was confirmed last week by the country's largest aftermarket auto parts retailer, AutoZone (NYSE: AZO). Like its top competitors O'Reilly Auto Parts (Nasdaq: ORLY) and Advance Auto Parts (NYSE: AAP), AutoZone easily topped analyst estimates in its most recent quarter. In fact, the company's first quarter was the eighth consecutive quarter in which earnings per share grew by more than 20%, and the 17th straight quarter that saw a greater-than-10% increase in EPS.

However, for the first time in many months I began to hear some caution, or at least a taming of expectations on the company's conference call. I don't believe AutoZone executives believe that the sector's growth is going to slow substantially, but perhaps the perfect confluence of conditions that have supported this growth of late are beginning to subside.
Source: Will Auto Parts Dominate Again in 2011?

And then, from Investors.com:
Advance Auto Parts (AAP) tumbled 4%, making its deepest drop below the 50-day moving average since the stock was forming its base in February. The auto parts chain broke out in April and had found support at its 50-day line repeatedly since then. The company has posted accelerating earnings growth the past two quarters, but it suffers from the same drawback as others in its industry: unimpressive sales growth.
Source: Stock Losses Worsen At Midday


The AZO Charts Tab (vol only) is included (below): (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

IV30™: 22.20
HV20™: 14.37
HV180™: 17.67

We can see the IV30™ is ripping today on the downward stock move. Finally, let's look to the Options Tab.

Notice that the Jan ATM straddle is worth ~ $10.00 and the stock has moved more than that today alone. Also, hmm...

Possible Trades to Analyze
With all these strikes, I'll just go over some general staretgies, rather than specific trades:

1. Buy the front month vol b/c hey, the stock has moved more than the ATM in one day. The trick here is to pick the straddle that the stock is going away from.

2. Sell the front month vol, it's elevated. The trick here is to sell the straddle where you think the stock is going toward.

3. A little more sophisticated. How's this for a best case scenario?
1. Sell the ATM vol b/c it's high
2. Purchase the earnings vol b/c it isn't that much higher than the front.
If the stock sits in Jan, then you might own a cheap ATM straddle into earnings (March, I think). How many $11 straddles would you buy for a $260 stock that moved $10 today with an earning event and two months of time value?... Where did the number $11 come from? It's the cost to calendar the ATM from Jan to Mar. Hmmm...

This is trade analysis, not a recommendation.

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