Friday, January 27, 2012

GPC: Parts for everything

Genuine Parts Co. (GPC) provides parts for the automotive after-market, industrial replacement parts, office products and electrical/electronic materials to customers in North America. The company's headquarters is in Atlanta, Georgia.

The auto parts group, operating under the brand NAPA, is a household name (at least if you're the member of the household who tinkers with the family car).

The industrial unit provides parts to fix machines big and small, and the office unit sells stuff ranging from adhesive notes and file folders to electric hand-dryers. The electrical/electronics unit sells products that seems to be aimed more toward guys who know how to use soldering irons.

So GPC is what a call a kitchen-sink niche company. They find an area where they can make stuff that's used all over the place, and then broaden the market in every way possible. A good capitalist practice.

The chart suggests that the practice is paying off, in the eyes of traders at least. 

Like nearly all companies, GPC has been on the rise since early 2009, the recession bottom, but the most recent increase, beginning Aug. 9, 2011, has been a steady alternation of increase and correction that has carried the price from $46.10 to a high of $65.38 on Jan. 19 , about a week ago. Since then the stock has traded sideways, mainly within the intra-day range of Jan. 19.

The price broke decisively into blue-sky territory in October 2011, surpassing all previous highs.

I've spoken about my liking for blue-sky stocks. I must also confess a weakness for corrections. Show me a stock that has gone up steadily without a break, and I'll conclude that it is most likely overbought. Periodic corrections, which shake out some traders, ensures that there's money on the table that might be interested in coming back into a position.

GPC had the most bullish chart of 17 stocks added today to Zacks list of strong buy recommendations. (See my essay "10,000 Charts" for a discussion of how I select stocks.)

GPC has a solid 19% return on equity with low debt, at 17% of equity. The price is also low compared to sales; it takes 82 cents of stock to control $1 in sales. Institutional ownership is 70%, which is neither low or high.

Taking the financials as a whole, I conclude that GPC has room to grow. It's easier to increase debt/equity from 19% than it is from a 30% starting point. If seven out of 10 shares are owned by institutions, that means there are institutions still out there that might eventually be interested in buying.

Earnings will be announced on Feb. 21 before the open. The quarterly dividend yields 2.78% at present, with the next ex-dividend date due in March.

The stock is well provisioned with options having slightly over-wide bid/ask spreads, despite the fact that its average volume is a bit low, at 653,000 shares.  The implied volatility is way low, at 26%, and stands lower than any level seen in the last six months. The peak implied volatility, in early October, was 52%.

With volatility that low, I'm reluctant to enter any short position on options. With volatility, the rule is buy low sell high, suggesting I would want to buy call options rather than taking advantage of time decay by setting up a short bull put spread.

The question, then, is whether the spreads are too wide for such low volatility. The May $60 calls have a bid/ask of 4.20/7.30, with open interest at present of 748 contracts. That's a liquid position, but a very wide spread.

Decision for my account: I'm really conflicted about this position, because of the bid/ask spreads. I'll pass for today and revisit the question on Monday. One alternative would be to buy shares rather than options, since the spreads are far narrower, but of course, the leverage is lacking.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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