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Surviving O’Reilly When the Parts Don’t Fit

Car on road
Car on road

If you’re a current O'Reilly Automotive investor, Wednesday’s guidance update must have felt like a fan belt broke on a lonely stretch of highway on a Sunday night without cellphone service.

TheStreet’s Ken Shreve warned O’Reilly Automotive investors over a month ago about the company in a Real Money Pro article titled “Time to Wheel Away.” (You need a Real Money Pro subscription to read, but if you don’t have one this is why I believe you need one.)

O’Reilly Automotive has lost about 17 percent of its market capitalization from Tuesday’s close. The loss in market cap is a result of expectations of earnings in the lower range of $1.13 to $1.17. This marks the end of three quarters in a row of beating estimates.

Unfortunately, expected earnings moving forward captured Wall Street’s attention. Analyst revisions down for the next earnings report outnumber higher revisions three to one. Wednesday’s move lower broke through strong support at the 200-day moving average of $63.50. Usually, the first break through and below the widely watched 200 moving average fails, and investors can expect a retest.

O'Reilly Automotive’s CEO Greg Henlsee blamed the weather and a shift of sales from this quarter to the first quarter for softness, but that doesn’t explain why June is below expectations.

According to Henlsee, “Our previously announced second-quarter comparable-store sales guidance reflected our slow start to the quarter in April due, we believed, to the shift of some business into the first quarter as a result of the early spring weather in many of our markets, and we expected sales trends would stabilize as the quarter progressed. We saw improved comparable-store sales results for the month of May; however, comparable-store sales in June were below our expectations, and we now expect comparable-store sales for the second quarter to finish in the range of 2 percent to 2.5 percent.”

Insiders sold over 632,000 shares, or about 15 percent of their holdings, in the last six months. Some will say there are many reasons why insiders sell (stock options, etc.), but the bottom line is the motivation to sell or buy is nearly the same. You don’t sell a stock you think is moving higher in price, regardless of the source.

Institutional sales were more aggressive in the number of shares sold in the last six months. Net flight of money from O’Reilly Automotive was 9.6 million shares, or almost 10 percent of holdings in the last quarter.

Other companies in the space are gapping down in price in sympathy including Advance Auto Parts, Autozone, and Genuine Parts Co.

Autozone opened Wednesday near the key support level of $354, which is the 200-day moving average, and bounced higher. This week Genuine Parts dropped below the 200-day moving average and gapped lower Wednesday. Monday and Tuesday was the wakeup call for Genuine Parts investors. Usually on the second breach of the key moving average is the one that “sticks.” Genuine Parts illustrates the point perfectly.

Advance Auto Parts is reaching oversold status from the recent fall in price. Advance Auto Parts is the weakest-looking chart by far.

Based on my experience with gap downs following reductions in guidance similar to O’Reilly Automotive, investors may not see the short-term low until Thursday or more likely Friday. Wednesday’s open near the 60-week moving average suggests some support near $78, but don’t count on it holding. More often than not the close is below the open in situations like this.

Resistance is now at $84 a share and it will take a great earnings release to breach it. Considering today’s announcement is to warn of lower guidance, don’t expect a beat for at least another quarter.

Bargain hunters and short sellers covering positions could push the price up about 30 percent to 50 percent in relation to the gap down price this week. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $80 a share, but also be prepared for bargain hunters to start positions under $75 as an entry. O’Reilly Automotive price-to-earnings multiple is about 20.

If you are looking for today’s drop to signal a buying opportunity, you are likely going to find Thursday or opening on Friday better than Wednesday. There is no hurry jumping on board with O’Reilly Automotive. Stocks dumping as a result of lowered guidance normally take a full two good earnings quarters to recover. Take your time and do your homework before allocating capital here. Look for the second break above $84 as the one that “sticks.”

Want to see a classic miss earnings result a few weeks after the fact? Take a look at Dell.

Dell disappointed and traded from $15 down to an intraday low of $12.31. Also, take close note of the next few days after earnings. This is a classic pattern I see often, and you can, too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Dell is now resistance.

What’s the best play with O’Reilly Automotive? There should be a very attractive trade coming up Thursday and or Friday. Near the end of the day if still trading lower, sell out-of-the-money puts . Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom.

It’s not one to get greedy with — hold on for a few days and as the implied volatility falls (hopefully with a nice dead cat bounce), exit out with a quick hit and run for profits. Otherwise, for longer-term investors, the best play is to wait until we are closer to the next earnings release for an entry.

—By TheStreet.com Contributor Robert Weinstein

Additional News: Auto Parts Stock Drop

Additional Views: Auto Parts Party Over

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Disclosures:

TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. Disclosure information wasn’t available for Robert Weinstein.

Disclaimer

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