Friday, June 8, 2012

AN: Selling wheels to the Sunbelt

AutoNation Inc. (AN) is a chain of 258 new vehicle franchises in 215 U.S. stores selling 32 different brands. The Fort Lauderdale, Florida company covers the field -- old cars, new cars, parts, repair and maintenance, finance and insurance. it mainly operates in the Sunbelt.

They have online car search, and one the slogans on their site says, "Making Car Buying Fun...". Me, I've always hated buying cars, so I can relate. And if you're the dealer, better to offer Fun than Cheap, yes?

AN was added today to the Zacks top-buy list. Zacks makes a few of its daily picks available to all, whether subcribers or not. AN was one of those public choices.

I haven't read the Zacks report on AN so that my own analysis will be independent of theirs. The Zacks report can be read here.

AN has set higher highs the last three trading days, breaking above the previous high in a sideways pattern that has lasted for more than a year.

Big pattern -- it looks like a descending triangle, which is a continuation pattern in a downtrend. AN isn't in a downtrend, so it dosn't count as a triangle, just repeated tests of a downside level -- around $32, punctuated by a series of lower highs.

The present uptrend within the sidewinder began April 11 at $32.81 and today reached a swing high of $37.14. The next major resistance on the upside is $37.34 from last February.

I like this chart because it shows momentum that could spell a breakout -- certainly if the stock is on the Zacks list it suggests that the analyst consensus supports that opinion.

The post-recession high of $41.55, set in August 2011, is big target. A rise to that level would mean a tidy 12% gain. A break above would be a set up for a long, profitable ride.

AutoNation has return on equity of 16% with fairly high long-term debt amounting to 122% of equity. High debt seems to be common for auto dealers -- they have an expensive inventory to finance before their pay day -- and so I don't consider AN's debt level to be crippling.

AutoNation has earned a profit in the last 12 quarters, with positive earnings surprises in 11 of them, including the last six. The last six quarters have seen growing or steady earnings.

Institutions own 83% of shares but the price is in the cellar. It takes 31 cents in shares to control a dollar in sales.

AN on average trades 725,000 shares a day and has a wide selection of option strike prices with acceptable open interest and bid/ask spreads.

Implied volatility stands at 26%, near the bottom of the six-month range. It rose slightly today after a steep drop on Thursday.

Traders are pricing in a 68% chance that the stock will close between $34.43 and $39.97 a month from now, for a maximum gain or loss of 7%.

Options volume suggests a low level of very near term speculation in AN -- It is only at 28% of the five-day average. Put volume is running slightly higher than that of calls.

AutoNation next publishes earnings on July 19.

Decision for my account: I could comfortably trade AN -- Good options, good finances. It's car sales, so a sharp decline in the economy would hurt sales. Despite all the Euro-zone inspired scare talk, I don't think the economy is going to crash. Color me optimistic.

The sideways nature of AN's current chart opens an opportunity for range-bound strategies, such as an iron condor. The upward acceleration makes it a good candidate for bullish directional trades as well.

However, I won't be opening an AN position for reasons specific to my account -- My trading funds are fully committed at this point, pending the June options expiration.

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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