The National Automobile
Dealers Association reported that at the end of 2011, there were a total
of 249 million vehicles operating on the nation's roads. The average
age of these vehicles was at a record high with the average car being in
use for more than 11 years and light trucks having an average age of
10.4 years. Given these facts, the news that auto sales were up 15% in
November as the economy struggled is less surprising. Many consumers are
finding themselves in a position where they absolutely need to replace
an aging vehicle.
Traders can take advantage of this trend in a number of ways. Automobile manufacturers could be bought if traders believe an economic recovery will push consumers into the new car market. Auto supply stores might be an option for traders who think that cash-strapped consumers will continue to delay purchases and do all they can to keep old cars running. Another trading possibility is to buy auto dealers, the retailers who stand to benefit from the purchase and service of a new or used car.
Sonic Automotive (NYSE: SAH) is a dealer with brand and geographic diversification that should help protect earnings from the potential impact of isolated problems in the industry. SAH offers 30 different brands of cars and trucks at 119 dealerships in 15 states.
The company's earnings have been relatively flat for the past five years, but that looks like it is about to change. After earning $1.39 per share last year, analysts expect earnings per share (EPS) to reach $1.67 this year, and then deliver average growth of about 20% a year. Based on this year's expected earnings, SAH could be worth about $33 a share with a price-to-earnings (P/E) ratio of 20, a value that would be reasonable based on the EPS growth rate. Many analysts believe that the P/E ratio should be about equal to growth rate of EPS.
That fundamental value would put SAH back near its all-time highs. In the 2008-2009 bear market, the stock sold off sharply, losing about 98% of its value. A rapid price recovery has been followed by an extended period of base building.
Now, SAH is showing renewed signs of growth and has gained nearly 40% in the past six months, making it one of the strongest stocks in the market right now. Recent price action seems to be completing a cup-and-handle pattern that offers a price target of more than $23 for SAH.
In the short term, SAH could deliver a gain of more than 17%. To manage risk on the trade, set a stop-loss at $18.40, which is just below the recent lows in the stock.
Call options offer another way to benefit from potential gains in SAH. May 2013 $20 call options are trading at about $1.80 and would be profitable if SAH rises above $21.80. At the target price of $23, the options should be worth at least $3 and offer a potential gain of more than 65%. May options are used because the company is scheduled to report earnings at the end of February, and these are the only options available with an expiration date that is after the next earnings release.
Traders can take advantage of this trend in a number of ways. Automobile manufacturers could be bought if traders believe an economic recovery will push consumers into the new car market. Auto supply stores might be an option for traders who think that cash-strapped consumers will continue to delay purchases and do all they can to keep old cars running. Another trading possibility is to buy auto dealers, the retailers who stand to benefit from the purchase and service of a new or used car.
Sonic Automotive (NYSE: SAH) is a dealer with brand and geographic diversification that should help protect earnings from the potential impact of isolated problems in the industry. SAH offers 30 different brands of cars and trucks at 119 dealerships in 15 states.
The company's earnings have been relatively flat for the past five years, but that looks like it is about to change. After earning $1.39 per share last year, analysts expect earnings per share (EPS) to reach $1.67 this year, and then deliver average growth of about 20% a year. Based on this year's expected earnings, SAH could be worth about $33 a share with a price-to-earnings (P/E) ratio of 20, a value that would be reasonable based on the EPS growth rate. Many analysts believe that the P/E ratio should be about equal to growth rate of EPS.
That fundamental value would put SAH back near its all-time highs. In the 2008-2009 bear market, the stock sold off sharply, losing about 98% of its value. A rapid price recovery has been followed by an extended period of base building.
Now, SAH is showing renewed signs of growth and has gained nearly 40% in the past six months, making it one of the strongest stocks in the market right now. Recent price action seems to be completing a cup-and-handle pattern that offers a price target of more than $23 for SAH.
In the short term, SAH could deliver a gain of more than 17%. To manage risk on the trade, set a stop-loss at $18.40, which is just below the recent lows in the stock.
Call options offer another way to benefit from potential gains in SAH. May 2013 $20 call options are trading at about $1.80 and would be profitable if SAH rises above $21.80. At the target price of $23, the options should be worth at least $3 and offer a potential gain of more than 65%. May options are used because the company is scheduled to report earnings at the end of February, and these are the only options available with an expiration date that is after the next earnings release.
| Recommended Trade Setup: | |
| Stock Trade | Options Trade |
| Buy SAH at the market price | Buy SAH May 20 Calls for $2 or less |
| Set stop-loss at $18.70 | Do not use a stop-loss |
| Set price target at $23 | Set price target at $3 |
| Potential Profit: 17% | Potential Profit: 50% |
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