AZO - Short Opportunity
Update 06/14/2016 10:13:09 AM: The Retail Survey Report published did not confirm the concerns I had going in. In fact, the result was better than expected and the automotive retail subsector exceeded average, so I obviously did not pursue the short strategy outlined, below. I am leaving this post for future reference, though. A different catalyst may emerge that might lead me to activate this idea.
Tomorrow we will see the the May results of the Monthly Retail Sales Survey, conducted by the U.S. Census Bureau. This is a volatile time series, as the chart below demonstrates. The chart also shows that exceptional strength came from the Autos/Auto Parts sector in April, but that too tends to bounce around quite a bit.
Against that backdrop, and given that I am long several retailers, I was looking today for a good retail sector hedge against any dislocation that might result from a poor report, tomorrow.
I tried to go long both the 76 and 77 strike puts on RTH with Friday (6/17) expiration. Unfortunately, neither of my limit orders were filled.
Another short opportunity I found just after the market closed was Autozone (AZO). The stock has been in an unrelenting 7 year bull run, that has seen the stock move from its 2008 recession low of about $85 to more than $800 in April 2016. Lately, however, it seems to me that the strength is waning: While AZO has periodically tested its 50 week SMAs in the past, it did so only very sporadically, and not without establishing a major new high in between visits to the moving average line. This year, it looks different. AZO touched the 50 week SMA in January and February, bounced off as usual, but managed to exceed the 2015 high of 803.25 only by less than 1%, before drifting back down to the moving average. RSI also failed to reach previous highs.
On the fundamental side, the picture for Autozone is mixed. On the plus side, its gross and net profit margins are as healthy as ever, and the company has been buying back shares. Both Moody’s and S&P rate Autozone’s debt as investment grade. But the balance sheet is still weak: The company has been funding its growth and stock buybacks with debt; liabilities have exceeded its assets ever since the Great Recession. Also, the 9-fold increase in stock price over the past 7 years has stretched valuation metrics: On a price/sales, price/earnings or price/fcf basis, the stock is at or near historic peak valuations. More troubling, efficiency measures are starting to look soft: Inventory days and Days Sales Outstanding are higher (worse) than they’ve been in the past 15 years.
To summarize: I don’t think that Autozone is a bad business. But its weak balance sheet leaves it vulnerable in a downturn. And after a long stretch of expanding valuation multiples, the stock looks tired. When a correction is so long overdue, it will often exceed the target on the downside.
I have no current position in AZO, but if tomorrow’s retail report is poor and AZO is not already down significantly at the open, I will be looking to short the stock.