Following large, recent, insider buying is a fun way to screen for stocks. It's not scientific, and shouldn't be an investment thesis on its own, but it still can be a very bullish sign. In fact, many studies have shown that stocks of companies with heavy insider buying go on to outperform the market by as much as 7%.
Auto parts and do-it-yourself dynamo, AutoZone, Inc. (NYSE:AZO), recently had two large insider purchases. Let's dig into the back-story to see if this stock really deserves a spot in the fast lane.
The buy Auto parts giant AutoZone recently saw two large insider purchases by two directors, Douglas Brooks and Bryan Jordan, of $150,000 and $101,728 respectively.
The bull It's natural for investors to look for catalysts when large insider purchase are made. In the case of AutoZone, and the auto parts industry in general, the bullish case is centered more around long-term trends than any short-term "buy" signal.
That's where I see the bull case for AutoZone. Really, since the recession in 2009 there's been a huge shift in consumer sentiment, with American's owning their cars for longer than ever. According to research firm Polk, the average age of all U.S. auto's is 11.4 years, and it's expected to grow 20% by 2018. If you agree with me, that game changing trends are the key to great investments, then you might look at these purchases as a sign that AutoZone's growth will continue. Since the recession hit in 2008, when consumers seemingly changed their views on autos, AutoZone has grown earnings over 22% annually.
It's not just AutoZone that benefit from this sentiment though. The entire industry, especially successful competitors such as O'Reilly Automotive Inc (NASDAQ:ORLY) and Advance Auto Parts, Inc. (NYSE:AAP). Both stocks have racked up more than a triple since 2008, and Advance recently completed a major acquisition of Carquest, which should help it rival AutoZone's revenues as number one in the sector.
Further, there may be more to the long-term growth of the auto parts industry, than older cars. A recent survey by MainStreet.com revealed that 70% of Americans prefer "do-it-yourself" when it comes to projects, over professionals. To me the survey reinforces a larger sentiment that seems to be brewing--Americans have become more thrifty, and less superficial. That has to be bullish for auto parts retailers, even as the economy continues to recover.
The bad It's not all sunshine and rainbows for AutoZone, there are definitely some concerns. The biggest concern, for all auto parts retailers, is the troubling idea of "peak driving." If you haven't heard, younger people have apparently decided they don't like the idea of driving very much. Over the past decade the miles driven by people aged 16-34 has dropped by 23%.