What happened

April was a pretty good month for shares in automotive related stocks. According to data provided by S&P Global Market Intelligence, auto parts retailers O'Reilly Automotive (NASDAQ:ORLY) and AutoZone (NYSE:AZO) rose 28.3% and 20.6%, respectively, over the month, and aftermarket automotive parts company LKQ (NASDAQ:LKQ) followed suit with a 27.5% increase. What's going on and why might these stocks be worth buying?

AutoZone and O'Reilly are auto parts retailers and are often seen as recession-resistant options for investors, since their sales are largely dependent on the mileage and the average age of an automobile -- factors that don't necessarily depend in the economy. 

Older cars require more replacement parts. And more miles driven implies more accidents -- a key factor in repair demand. And the sweet spot for auto repair is seen as somewhere between seven to ten years. In this range, a car is old enough to start needing replacement parts, but not too old that its owner stops maintaining it properly. LKQ, a leading provider of alternative parts to automotive repair shops, can be seen in a similar vein to the auto parts retailers.

A man diagnosing a car for repair.

Image source: Getty Images.

So what

In a recession, consumers will likely defer purchasing a new vehicle and run an older vehicle longer. Indeed, the evidence from 2008-2009 is that auto parts retailers can continue to grow same-store sales even in a severe recession.

AutoZone and O'Reilly Automotive same store sales growth.

Data source: Company SEC filings. YOY = year over year.

Although the amount of miles driven will be reduced by a recession, it's worth noting that there's another factor that could push miles driven higher, even in a recession.

Specifically, gasoline prices are much lower right now than they were entering the last recession. As you see in the chart below, oil was around $100 a barrel in the early stages of the 2008-2009 recession. Also note that miles driven increased markedly after the price of oil slumped in 2014.

US Moving 12 Month Total Vehicle Miles Traveled Chart

Data by YCharts.

Putting all of this together, you could view matters based on two different scenarios: if the pandemic is contained or if lockdowns are extended. 

What happened with all three stocks in April was that market sentiment shifted toward the pandemic being contained. As you can see below, even in that situation, all three stocks should be able to benefit, whether the resulting economy is weak or strong. Throw in a relatively low price of oil (and therefore low gasoline prices) and you have favorable outcomes in both weak and strong economies.

Scenario

Weak Economy

Strong Economy

Pandemic contained

Miles driven improve moderately, average car age increases, supply-chain pressure eases

Miles driven are much higher, average car age declines as new cars are sold, supply-chain difficulties ease

Extended lockdowns

Miles driven are reduced, average car age increases, difficulties with the supply chain

*N/A

*A strong economy is unlikely under extended lockdowns.

Supply chain difficulties refer to the problems of sourcing auto parts when factories are closed during containment measures.

Of course, there's no guarantee that extended lockdowns won't be in place, and that would certainly be bad news for all three stocks. But the interesting thing about the car parts retailers and LKQ is their potential to remain in growth mode even if the economy is relatively weak in a post-COVID-19 world. That's not something you can say about many stocks if the pandemic is contained and a weak economy follows.

During LKQ's recent earnings call, CFO Varun Laroyia said China reported that 2 1/2 to 3 months after hitting its peak in virus infections, miles driven in individual vehicles had returned to 80% of pre-crisis levels. But he also said that in the U.S., "We think it's going to be much more of a gradual return."

Now what

Investors should keep a close eye on the miles-driven data and the shape of the economic recovery. Both look likely to improve from the perspective of these three companies, and low gasoline prices will surely encourage more traffic.

As such, these three stocks provide a useful balance and diversification to a portfolio, particularly for investors holding too many cyclical stocks.