There's always a bull market somewhere! When we recommened O'Reilly Automotive in 2010, the S&P 500 was at 1,228. It recently closed at 1,257, up 2%. An investor holding an S&P 500 index fund would have earned about 4% during the period, including dividends. By comparison, O'Reilly closed recently at $79.53, a return of 30%.
In our feature, we noted the company's counter-cyclical nature. Between 2005 and 2009, new vehicle sales had fallen from over 17 million units to fewer than 11 million, as tough economic times kept people in their old cars longer. That meant increased demand for auto parts, and the replacement parts industry turned into a very good one for investors during those years. ORLY stock had already rallied 60% in 2010 when we highlighted the shares, but we thought they had more room to run.
The pick started out sluggish, declining 10% to the mid 50's, while the S&P rallied 10% into February 2011. Good year-end results, including 9.2% same-store-sales growth, gave the stock a helpful boost from its February lows, but ORLY continued to lag the broader market. Investors were feeling bullish then, and the countercyclical nature of the auto parts industry appeared to hampering O’Reilly’s relative performance.
Then, as optimism receded and the market traded flat into July, ORLY shares caught up. By May, shares were at 60 again. With new store openings tailing off, we noted that the company was starting to use its impressive cash flows to buy back its own shares, which is frequently—though not always—a bullish signal for investors. By early July, shares were over 65 again, matching the returns of the S&P 500 since the time of selection. We were back to even, so to speak.
The month of July was painful for the entire market, but starting in August, money started flowing into ORLY shares again. The counter-cyclical trade appeared to be back on. Shares were up to 77 when we commented on the company’s Q3 results in the December 2011 issue, noting: "In this low-growth environment, ORLY has become something of a market darling. The current price leaves little room for error, but this is a company that rarely takes a wrong step."
The relative outperformance has held up over the last month. We continue to admire O'Reilly for its end market's consistency during both good and bad economic times and management's laser focus on results. Investors should consider that sales growth is likely to slow somewhat from here. The last year has been uncharacteristically slow for ORLY's acquisition team, but more acquisitions will probably be in the company's future. Once a fragmented world of inefficient, local competitors, consolidation is turning the industry into a battle between giants. Good targets at good prices appear to be hard to find right now, although with at least two significant publicly-traded franchises known to be on the auction block, we wonder how much longer ORLY will wait. At this time, we would reiterate our December warning that a high stock price leaves little room for error. Still, the company's record of excellence and continued stress on would-be buyers of new cars suggests investors may still be able to make some money here.
Disclaimer: This company was selected for review in part because of its performance over the past year. Any outperformance relative to the broader market is not necessarily indicative of performance of the broader Investor Advisory Service.