Please ensure Javascript is enabled for purposes of website accessibility

Why Shares of These Auto Parts Retailers Rebounded Wednesday

By Daniel Miller - Mar 25, 2020 at 3:57PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

And here's what could happen long term.

What happened

Shares of Advance Auto Parts (AAP 2.50%), O'Reilly Automotive (ORLY 1.73%), and LKQ (LKQ 3.12%), a group of auto parts retailers, all spiked over 10% Wednesday as broader markets logged a second day of strong gains thanks to a huge $2 trillion stimulus deal. But are these retailers poised to continue rebounding?

So what

The deal calls for a range of aid, including $1,200 government checks to many Americans (read here to know if you'll receive a check) and hundreds of billions of dollars to battle the COVID-19 coronavirus pandemic and its negative effects. The stimulus agreement set the stage for the S&P 500 and Dow to log solid gains throughout most of Wednesday, adding to Tuesday's surge, before giving back some gains near the end of the trading session.

Rebounding stocks included a group of auto parts retailers. They are a part of the broader automotive industry that has been brutally sold off thanks to plants shutting down, less discretionary miles traveled, and a likely big decline in global vehicle sales as uncertainty makes consumers a little more cautious about big-ticket purchases. More specifically, fewer Americans on the road thanks to social distancing and/or quarantining means less demand for a supplier such as LKQ, which sells parts to collision shops and mechanics. AutoZone (AZO 2.38%) noted in its recent quarterly report that COVID-19 could negatively affect not only demand for its products, but also store hours and workforce availability. And it could magnify the risks with its global sourcing of merchandise, not a good recipe for investors or businesses.

Man testing a battery charge

Image source: Getty Images.

The good news, in addition to the broader stimulus deal, is that these companies could possibly boost their cash position similar to Advance Auto Parts, which announced it is borrowing $500 million under an existing $1 billion credit agreement. These stocks are rebounding temporarily thanks to the stimulus bill, but how will these companies rebound in the months ahead?

Now what

Savvy investors likely know that Advance Auto Parts, O'Reilly, and AutoZone all tend to perform well during downturns and/or recessions. That's because consumers looking to save a buck during hard times turn to do-it-yourself solutions, which increases foot traffic at aftermarket auto retailers. Downturns also mean that consumers put off big-ticket purchases and the average age of vehicles rises, which spurs demand for replacement parts.

But investors have to consider that these retailers might react differently this time. One reason the stocks could trade differently is because COVID-19 is forcing many consumers to purchase only necessities, which will cause discretionary retailers to suffer until the outbreak is under control. And if the economy snaps back, consumers may not need to save a buck with do-it-yourself options in the near term, although a strong economy would still be a positive for these auto parts retailers.

There's still plenty of uncertainty surrounding the outbreak and its economic damage, and it will get worse before it gets better. Savvy investors should spend this time digging into balance sheets to double-check if the stocks they own can weather the storm, and to scan the markets for strong companies poised to rebound once we move past the COVID-19 pandemic.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

O'Reilly Automotive, Inc. Stock Quote
O'Reilly Automotive, Inc.
$639.06 (1.73%) $10.87
Advance Auto Parts, Inc. Stock Quote
Advance Auto Parts, Inc.
$183.10 (2.50%) $4.47
LKQ Corporation Stock Quote
LKQ Corporation
$49.92 (3.12%) $1.51
AutoZone, Inc. Stock Quote
AutoZone, Inc.
$2,158.91 (2.38%) $50.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.