When you think about magnificent stocks, I'm sure the "Magnificent Seven" tech-focused and innovative enterprises come to mind. Their returns in the past decade have certainly been spectacular.
But there are two lesser-known and definitely more boring companies that have also trounced the market. I'm talking about O'Reilly Automotive (ORLY 1.71%) and AutoZone (AZO 1.65%). The former is up 678% in the past 10 years, while the latter has risen 498% during that time.
Should you buy these two skyrocketing retail stocks with $100 and hold through 2024 and beyond?
NASDAQ: ORLY
Key Data Points
Steady wins the race
These businesses won't win any awards when it comes to excitement and disruptive potential. They are quite the opposite. However, being boring has clearly worked out well for investors.
Through their networks of thousands of stores, both O'Reilly and AutoZone sell aftermarket car parts and supplies to both DIY and commercial customers. That detail about aftermarket parts is critical, as these companies thrive when selling to consumers that own cars running past the original manufacturer's warranty. With the average age of vehicles on the road slowly rising with each passing year, coupled with more miles driven, there is plenty of demand out there.
Basically, these businesses perform well when there's more wear and tear on cars. It's of the utmost importance for people to have working vehicles to manage their day-to-day life, whether it's to run errands, drop off and pick up kids from school, or get to work. This makes both O'Reilly and AutoZone somewhat recession-proof.
That's a fantastic quality to have in stocks that you own because you don't need to be able to predict what the economy is going to do next. The companies in question will do well no matter what.
Capital returns
Given that they experience stable demand trends regardless of the economic environment, these companies are able to generate copious amounts of profits and cash. O'Reilly and AutoZone raked in $2 billion and $2.1 billion of free cash flow, respectively, in their last fiscal years. This is the true mark of a financially sound enterprise.
Neither business pays dividends. But both management teams are very aggressive when it comes to share buybacks. Just in the past five years, a time period that included various disruptions like the pandemic, supply chain bottlenecks, inflationary pressures, and higher interest rates, O'Reilly's share count was reduced by 26%, while AutoZone's shrunk by 30%.
For existing investors, this is a financial boon because it boosts earnings per share. Shareholders' ownership stakes increase over time if they do nothing. That's a powerful development.
What's encouraging is that this attractive capital-return policy comes after executives reinvest in growth initiatives. After opening new stores or distribution facilities each year, share buybacks are done. That should lead to even greater revenue and earnings over time.
NYSE: AZO
Key Data Points
Is the price right?
With the overall market in record territory, it's probably not surprising that both O'Reilly and AutoZone are also near all-time highs. Just like their underlying businesses, these stocks continue to deliver for investors.
This means that they aren't necessarily trading at bargain prices. On a price-to-earnings (P/E) basis, both stocks are selling at some of their highest levels in the past decade. Consequently, it looks like these boring businesses have caught the eye of the market, with investors being incredibly optimistic about their prospects.
It's important to ask yourself how much emphasis you place on valuation. Of course, it would be a much better situation if O'Reilly and AutoZone were trading at cheaper P/E multiples. But what gains would you be giving up if you waited on the sidelines? I believe the best move might simply be to spend $50 on each of these stocks and hold for the long term.
