AutoZone, Inc. (AZO), Advance Auto Parts, Inc. (AAP), And Why the Bull Market in Stocks Is Far From Over

Look to retailing

Two industries that historically perform well during a rising US dollar and therefore a good US retail environment are dollar stores and auto retailing.

AutoZone, Inc. (NYSE:AZO) is the nation’s largest dedicated retailer of automotive supplies. It has more than 4,700 stores in 49 states and a sizable presence in Mexico. It is the most efficient operator among peers, with superb margins.

AZO Operating Margin TTM data by YCharts

Advance Auto Parts, Inc. (NYSE:AAP) has the least expansive network of the big three with 3,900 stores in 39 states. It lacks a major presence in the West coast. Margins are worse by a significant amount, but like AutoZone, Inc. (NYSE:AZO), it is well positioned to capitalize on continued demand from a record high in the average age of vehicles on the road at 10.8 years.

Both companies are seeing weakness in same-store-sales as tough comps and increased new car sales remain viable headwinds. The stocks have been sluggish in the last year following several years of out-performance. Will a strong dollar be the impetus to get them moving higher again? Valuation has come down to more average levels in recent months and doesn’t appear to be a headwind moving forward. Why is Advance Auto Parts, Inc. (NYSE:AAP) trading with a similar multiple despite the weaker operational performance? This could be due to the fact that it appears on several LBO screens given its relatively manageable market capitalization of $5.8 billion and opportunity for operational improvement.

AZO PE Ratio TTM data by YCharts

Investment implications

As shown above, consumer discretionary stocks continue to indicate a market that is not imminently facing a reversal from the cyclical bull that has propelled stocks to record highs. Certainly gyrations and pullbacks are going to happen, but as has been the case since March 9, 2009, each pullback has ultimately led to higher highs. There is no evidence to suggest this is about to change. The facts from my previous three articles on stock market indicators highlight this case: When high-yield bonds, the yield curve, and consumer discretionary relative strength are all giving a green light, it is clear that investors should be fully allocated to U.S. equities. The retailing industry, specifically auto retailing, makes for a viable source of new investment capital.

The article Why the Bull Market in Stocks Is Far From Over originally appeared on Fool.com.

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