Option Trade 
Advance Auto Parts, Inc. (NYSE:AAP) Puts 
Monday, February 06, 2017

** OPTION TRADE: Buy the AAP MARCH 17 2017 155.000 put at approximately $3.60. Place a pre-determined sell at $7.20.

Note: No protective stop losses added -- but if you wish to do so make it $1.45.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey

Advance Auto Parts, Inc. (NYSE:AAP), a provider of automotive aftermarket parts in North America, serving do-it-for-me (commercial) and do-it-yourself (DIY), customers, as well as independently owned operators,) is expected to post its quarterly results after the market closes on February 9. Analysts forecast fourth-quarter earnings of $1.09 per share, down from $1.32 during the same period last year. The stock has been trending lower over the last two months, and shares are currently down 4.4% on the year.

The biggest concern right now for both Advance Auto and its biggest competitor AutoZone (AZO) is that Amazon (AMZN) is trying to aggressively move into the market. Amazon has recently made deals with some of the largest auto parts makers, and the news of these contracts hurt shares of all the major auto parts retailers.

For years now, investors have known that someday Amazon.com (AMZN) and other online sellers would be a threat to auto-parts retailers, but they have largely dismissed the risk—in many cases rightfully so, as the stocks would sell off and then bounce back. So when the New York Post reported recently that Amazon had started to target the U.S. auto-parts retailers, the stocks reacted: Shares of AutoZone fell 4.2%, Advance Auto Parts dropped 2.2%, and O’Reilly Automotive tumbled 3.3%. And analysts, who are predominantly bullish on auto-parts retailers, rushed to defend the stocks.

Advance Auto Parts Inc has a market cap of $11.83 billion, a price-to-earnings ratio of 26.32 and a beta of 1.13. The company’s 50 day moving average is $170.35 and its 200-day moving average is $159.84. Advance Auto Parts Inc has a 52 week low of $131.59 and a 52 week high of $177.83.

Factors to Consider

Shares of U.S. auto part retailers fell sharply recently following a report that Amazon.com Inc (AMZN.O) had set its sights on the $50 billion do-it-yourself after-market auto parts business.

Shares of Advance Auto Parts fell 4.2 percent to $164.27 at the time.

Amazon has struck supply contracts with some of the largest parts makers including Federal-Mogul Holdings Corp FDML.O, Dorman Products Inc, Robert Bosch GmbH and Cardone Industries Inc.

It seems that Amazon is both paying vendors more and offering customers lower prices than brick-and-mortar competitors on like-for-like products, according to RBC Capital Markets analyst Scot Ciccarelli.

Northcoast Research analyst Nick Mitchell estimated that about 40 percent for Advance Auto Parts sales come from the retail auto parts or the do-it-yourself market targeted by Amazon.

Amazon, the world's largest online merchant, is known for disrupting traditional brick-and-mortar businesses.

"If Amazon is committed ... they are definitely going to pick up some share. In terms of the disruption they will cause, I don't think it will happen as quickly," Mitchell told Reuters.

In a report released Wednesday week ago, Wolfe Research analyst Chris Bottiglieri called a potential tariff war between the U.S. and Mexico or China a “potential catalyst for increased online encroachment,” though one he considered a “black swan,” a financial term for an unpredictable event. Why would tariffs be bad for traditional auto-parts retailers like AutoZone, Advance Auto Parts, and O’Reilly? Bottiglieri writes that higher prices as a result of tariffs could cause shoppers to put off purchases as long as possible, and focus more on what they’re paying.

Hedge Fund Positions

Aviance Capital Partners LLC decreased its position in Advance Auto Parts by 34.3% during the third quarter, according to its most recent 13F filing with the Securities and Exchange Commission (SEC). The institutional investor owned 11,237 shares of the company’s stock after selling 5,872 shares during the period.

Also, Blackstone Group L.P. reduced its stake in Advance Auto Parts by 42.9% during the third quarter, according to its most recent filing with the Securities and Exchange Commission. The institutional investor owned 252,686 shares of the company’s stock after selling 190,062 shares during the period.

Analysts Opinions

BTIG Research reaffirmed their sell rating on shares of Advance Auto Parts Inc in a research note released last Tuesday morning. BTIG Research currently has a $120.00 price objective on the stock.

Other research firms comments....

  • J P Morgan Chase & Co reaffirmed an overweight rating on shares of Advance Auto Parts in a research note on Thursday, December 8th.
  • Bank of America Corporation downgraded shares of Advance Auto Parts from a buy rating to a neutral rating in a research note on Friday, January 13th.
  •  Wedbush reaffirmed an outperform rating on shares of Advance Auto Parts in a research note on Tuesday, December 13th.
  • Finally, Guggenheim assumed coverage on shares of Advance Auto Parts in a research note on Wednesday, January 18th. They set a neutral rating on the stock.

Harvey’s Options Volatility Indicator

Conclusion

Advance Auto Parts has been a top performer—gaining between 22% and 33% annually during the five years ending on Dec. 31, 2016, more than double the S&P 500’s 14% return during the same period—and only now are they starting to weaken.

However, the writing seems to be on the wall – with Advance Auto Parts off 2.8%, so there is already a concern about the future of the stock, and many investors, who have capitalized on their long runs of outperformance, are now selling and taking their benefits already achieved.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the AAP MARCH 17 2017 155.000 put at approximately $3.60. Place a pre-determined sell at $7.20.

Note: No protective stop losses added -- but if you wish to do so make it $1.45.

 ”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!

Options traders are not successful because they win.

Options traders win because they are successful.

 

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