Just when you think a stock has had enough punishment, the sellers always seem to find a way to push it down more. At least, that's how Advance Auto Parts' (AAP 0.58%) downtrodden investors must have felt throughout this challenging year.
In hindsight, I should not have recommended Advance Auto Parts stock in June. Perhaps I felt that it had gone down so much that there was nowhere to go but up.
Yet, that's only true if a stock's price reaches zero. Thanks to the horrendous performance of Advance Auto Parts stock, I've learned a valuable lesson about value investing: Rooting for an underdog only makes sense if that dog doesn't keep biting you.
Sometimes, the early sellers are right
At first blush, Advance Auto Parts might appear undervalued or at least very reasonably valued. The stock chart tells a tale of panic selling followed by a steady grind lower:
With every leg down, contrarian investors and Warren Buffett wannabes may have perceived a blood-in-the-streets moment. Investors surely didn't appreciate Advance Auto Parts' quarterly dividend cut from $1.50 per share to $0.25 earlier this year, but the 10-ish trailing price-to-earnings (P/E) ratio (versus the sector median P/E of 15 or 16) was like catnip for risk-tolerant value hunters.
Yet, Advance Auto Parts just kept on dropping, and the company's second-quarter 2023 earnings report didn't do much to assuage investors' concerns. Management provided no evidence that Advance Auto Parts would gain market share against favored rivals like AutoZone and O'Reilly Automotive. Analysts took Advance Auto Parts to the woodshed, and rightly so, as the company disclosed dramatic year-over-year declines and Wall Street estimate misses in EPS and operating income. Making matters worse, Advance Auto Parts slashed its full-year guidance for the company's EPS and operating profit margins.
And then, there was radio silence
There was, however, a glimmer of hope as Advance Auto Parts replaced Tom Greco with Shane O'Kelly in the roles of president and CEO. All was not lost, it seemed, as O'Kelly came to Advance Auto Parts with executive experience at a Home Depot subsidiary.
Shareholders thought that some fresh C-suite blood might give Advance Auto Parts the kick in the pants it desperately needed. Also, Advance Auto Parts revealed that it had "initiated a comprehensive operational and strategic review," and O'Kelly echoed this announcement.
That was back in August. Fast-forward to November and Advance Auto Parts' press releases page has served up a veritable nothing sandwich for update-hungry investors. If you're looking for a sign of progress during the past three months -- just a hint that Advance Auto Parts was making headway on that "strategic review" -- you'll come up empty-handed and disappointed.
One can only hope that O'Kelly and Advance Auto Parts have something really special brewing for the company's third-quarter earnings report and conference call. Surely, after three months of radio silence, investors will hope for the best as Advance Auto Parts' management delivers its quarterly data and remarks on the morning of Nov. 15.
But then, the other half of "hope for the best" is "prepare for the worst." Now is not the ideal time to invest in Advance Auto Parts, simply because the company needs to hit a home run on Nov. 15. Not only are not-as-bad-as-expected third-quarter results a baseline necessity, but investors will undoubtedly be looking to O'Kelly to deliver inspiring commentary and, naturally, a barn burner of a "strategic review."
Nothing less will do, I fear, after so many months of disappointment from Advance Auto Parts. Thus, my previous "nowhere to go but up" hypothesis is now turned on its head; unfortunately, with the company having so much to lose and plenty of ways to fail on Nov. 15, I'm now afraid that Advance Auto Parts may have nowhere to go but down.
