Shares of Advance Auto Parts (NYSE:AAP), O'Reilly Automotive (NASDAQ:ORLY), and LKQ (NASDAQ:LKQ), 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?
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 (NYSE:AZO) 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.
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?
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.