Advance Auto Parts: Retail Trends Suggest Big Gains Ahead

Key Points

• The latest retail sales data reveals that the motor vehicle and parts industry led the quarter, signaling a potential investment opportunity in this sector.
• Advance Auto Parts trades at 51% of its 52-week high, offering a great risk/reward setup today.
• Wall Street analysts and institutional buyers like the proposition, so they've boosted it and bought it here as well.

Now that Goldman Sachs has warned investors about potential tail risks in the broader S&P 500 index, it would be good for investors to start looking for opportunities that offer fewer downside risks in 2025 but still carry double-digit upside. Today, investors can identify one clear theme through an in-depth analysis of the retail sector and, more importantly, trends in retail sales data numbers.

This theme can be followed all the way into a single stock, where investors can eliminate downside risks given how cheaply it trades today relative to its 52-week high and still carry into 2025 with enough upside to leave its peers behind. Through this analysis, investors will also find out why institutional investors decided to up their stakes in this company, connecting the technical and fundamental stories.

The name of the company is Advance Auto Parts Inc. NYSE: AAP, and as part of both the retail and transportation sector, a recent bottoming and rally in its stock price could be attributed to a favorable retail sales report for the past month, pointing to continued demand for automotive parts and maintenance-related services. Before investors can justify the upside in this stock, they must first understand what is happening behind the scenes. Here it is.

What the Retail Sales Report Says

For November 2024, the motor vehicle & parts dealers industry pushed a net expansion of up to 2.6% to lead every other space. The same can be said for the previous two months, meaning that most of the retail demand is headed to this segment and market, and there might be a couple of reasons why.

Considering that interest rates on car loans are still near cyclical highs, and so are new car prices, there seems to be very little demand for new cars lately. Investors can see this trend in action by watching the recent declines in stocks like CarMax Inc. NYSE: KMX or Cars.com Inc. NYSE: CARS over the past month, showing the market’s increased risk perception due to the report.

On the other hand, Advance Auto Parts has risen by as much as 16.3% over the past quarter, going hand in hand with the growth in motor vehicle & parts dealers report during the same period. This theme was enough to get the market to turn bullish again on Advance Auto Parts stock, leading it to outperform the S&P 500 by over 16% this quarter.

Yet, the stock still trades at a low level of only 51% of its 52-week high today, meaning the ceiling is much higher than today’s levels, and the broader market (and Wall Street analysts) are very aware of that.

The Market’s Take on Advance Auto Parts Stock

There is a reason the market is willing to pay a price-to-earnings (P/E) ratio of up to 61.5x for Advance Auto Parts stock today. This is a steep premium compared to the auto supply stores industry, which commands an average valuation of 25.8x.

Some might call this expensive today, but others will understand that the market will always pay a premium valuation for stocks that it believes will outperform its peers in the near future. So far, Wall Street analysts have given the market enough evidence for this to be the case, as can be seen in earnings per share (EPS) forecasts.

While the company reported a net loss per share of $0.04 in the past quarter, Wall Street analysts think that the same quarter next year could bring on closer to $0.95 in EPS, a massive boost from where the stock is today. Considering that the low demand for new vehicles could create a need to maintain used vehicles, this one makes sense.

Driven by this boost in EPS, Barclays decided to keep a $54-a-share valuation on Advance Auto Parts stock as of January 2025. To prove this valuation right, the stock would have to stage a rally of up to 20.3% from where it trades today, offering investors a favorable risk-to-reward ratio today.

But these analysts weren’t the only ones willing to express their optimism on the stock. Some institutional buyers who also see this playing out decided to buy some more of the stock recently, such as those from Pzena Investment Management, who boosted their stakes in Advance Auto Parts stock by 140.3% as of November 2024.

This new allocation raised their entire position to a high of $113.4 million today, or 4.8% ownership in the company, giving retail investors another bullish gauge to consider when developing their potential Buy thesis.