Tuesday, February 14, 2012

ORLY: Under the hood

O'Reilly Automotive Inc. (ORLY) sells after-market parts, tools, supplies, equipment and accessories both to professional auto mechanics and to dudes who like to get greasy under the hood. The company is headquartered in Springfield, Missouri.

ORLY's most recent rise began at $63.75 on Oct. 4, 2011 and carried the price to $85.32 on Jan. 19 of this year. Longer term, the price has been on a steep rise since October 2008.

As a result of the recession, people are holding on to their cars longer, which means greater need for repairs and parts, which means business for ORLY and its competitors. No one who in a position  to have a valid opinion expects a swift recovery, so ORLY's market seems safe for awhile.

ORLY had the second-best chart among 34 stocks added today to the Zacks top buys list. 

MNST was the champion, but I wrote it up three weeks ago and don't want to repeat the analysis. The stock had dropped off  Zacks' top shelf briefly and then been reinstated. Good chart. Good stock. I own it.

IMO and OIS completed the final four.

At a micro level, the price dropped for two days after the mid-January peak, and since then has traded in a slightly upward-trending range.

It will take a push above $85.32 for the stock to return to its uptrend, but the upward bias of the correction suggests to me that the breakout will occur.

Return on equity is 17%, nearing growth-stock territory, and the company's long-term debt stands at 28% of equity. That's a bit higher than I like, but still on the low side for specialty retailing.

Institutions love O'Reilly -- they own 89% of the stock and have bid up the price so that it takes $1.83 in shares to control a dollar in sales.

O'Reilly is moderately liquid, with 1.2 million shares traded daily, on average. The problem comes with the options, which have an adequate inventory  and three-figure open interest in strikes near the money, but wide bid/ask spreads on some.

Implied volatility is low on the six-month chart, at 25%. That seems too low to justify the wide spreads that I'm seeing on strikes just $5 away from at-the-money.

However, the at-the-money spreads are quite reasonable, both in the near month (March), used for net-credit positions, and the out-month (May) used for net-debit positions. Given the low implied volatility, I would play ORLY by buying long calls for May expiration.

Next earnings are expected on April 27.

Decision for my account: I've bought May long calls on ORLY, with an $80 strike price.

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
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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