Auto Part Stocks Get Short-Term Boost, Face Long-Term Challenges

The economic recovery that started in 2009 was long but shallow. Many parts of the economy didn't fully recover until the middle or later parts of the year. One result was that people kept their cars for a longer time rather than buying a new one.

As of June 2019, the average age of a car on the road is almost 12 years. During the bull market from 2003 to 2007, new car sales peaked at just under 18 million sales. It didn't exceed this level until 2015 despite the US population growing by 20 million over this period.

Auto part stocks have benefited from this trend and have been one of the strongest performers during this bull market. Auto Zone (NYSE: AZO) is up just over 700%, O'Reilly Automotive (NYSE: ORLY) is up 1,100%, Advanced Auto Parts (NYSE: AAP) is up 285%.

Short-Term Catalyst

Recent developments have also been supportive for these stocks. The combination of supply chain disruptions rippling across the globe creating multiple bottlenecks. Nearly all manufacturing is based on the "just in time" system which reduces costs and minimizes inventory. This is brilliant during good times but increases fragility during unforeseen events like this. Of course, there is the economic slowdown which will certainly affect demand for new cars as well.

On a short-term timeframe, the stocks are showing relative strength. This makes them a candidate for a countertrade trade for anyone who thinks stocks may have bottomed for the short or intermediate-term. Recent lows are a good stop point.

Long-Term Catalyst

While the short-term outlook looks encouraging for this group, some threats may limit upside. The major one is the same threat facing nearly every retailer - Amazon (Nasdaq: AMZN). Amazon has eaten many high-margin retail businesses and has set its sights on auto parts. Its prices are often cheaper due to its size, willingness to take losses to win market share, and infrastructure.

Additionally, while the older generation's instinct may be to stroll into the nearest auto parts store when they need something, the younger generation is much more likely to search Amazon with its proposition of low prices, one-click ordering, and next-day delivery.