Advance Auto Parts Fails to Advance (NYSE:AAP)

Shares of leading automotive aftermarket parts provider Advance Auto Parts NYSE: AAP took a beating on Tuesday in heavy trading following the company’s Q3 earnings release.

Historically, Advance Auto Parts NYSE: AAP has closed higher after six of the last eight earnings reports. Today was not one of those days. Profit and revenue numbers beat expectations and while same-store sales were also up YOY these crucially missed estimates.

There was an ugly gap down on the news when markets opened and shares remained under pressure throughout the session, finishing down over 7% from Monday’s close. Investors had to leave the office with the unenviable tag of being the stock being the S&P 500’s worst performer of the day. This will be a particularly bitter pill for investors to swallow after having enjoyed a strong couple of months leading up to this latest release.

Strong Fall Performance

Shares had put in a particularly good shift in the 3 months since August. Despite falling almost 30% from April of this year beforehand, they’d recovered most of that territory and hopes were high for these earnings. Bank of America Merrill Lynch analysts were confident enough to reiterate their Buy rating on the company in a note on Monday.

However, with shares now trading back at September levels, the stock has undone 2 months worth of grind in a single day.

Having easily outpaced the S&P 500’s 8% gains in that timeframe, it’s possible investors had too much optimism baked in and any miss on estimates would have led to more selling than buying.

Technical Difficulties

There were reports of heavy volume in AAP puts in the leadup to the release, suggesting the smart money saw the miss coming and positioned accordingly. A put is a type of an option contract that’s bought by investors who believe a stock will fall in price.

Volume on AAP puts was 30x the average on Monday and one trader in particular looks to have nailed the post-earnings actions; a $330,000 long put spread position that expires this Friday was opened with the long leg at $160 and the short at $145. Whoever it was behind this was betting the stock would fall below $160 but not as far as $145. With the stock sitting at $156.14 as we head towards Wednesday’s session, at least someone’s happy with the sharp decline.

From a technical point of view, history was leaning in his favor. Shares have struggled to get past $180 time and time again. They’ve been turned back from that level three times in the past 12 months. They also tapped out and retreated back from it in 2016 has given investors a little taste of life above $180 in 2015.

Advance Auto Parts NYSE: AAP Tailwinds and Headwinds

It’s not all doom and gloom though. The company has paid a dividend for years and there’s an ongoing share repurchase program; two longer-term initiatives which should take the sting out of Tuesday’s decline. An online partnership with Walmart was launched in 2018 and this has great potential to get products in front of a younger audience who are used to sourcing and buying online.

That said, there are some clouds on the horizon. September retail sales, announced in October, painted a picture of pessimism among consumers. In particular, automakers and auto-parts dealers reported the largest decline in sales out of the 13 categories tracked. The industry is also particularly sensitive to the ongoing trade war with China given as much as 45% of its products are sourced there.

Despite or perhaps in spite of all this, institutional ownership of the stock is through the roof, literally. Over 100% of the float is held by institutions. This unusual scenario means not only have the big players snapped up as many shares as possible but they also own most or all of the borrowed shares that short-sellers have used to sell the stock. One has to wonder how much longer will they’ll be happy to hold a stock that’s essentially flat since 2015 and has plenty of headwinds to face into as we head towards 2020.