Auto Parts Stocks Rise Amid Tariff Collision Avoidance

Industry retailers remain exempt from trade tariffs for up to six months

Auto parts companies remain particularly sensitive to trade tariffs given that as much as 45% of their products are directly sourced from China, according to Wells Fargo analyst Zachary Fadem, per Barron's. Fadem believes that, although auto parts retailers have significant tariff exposure to China, it remains manageable. He also remarked that recent selling in the industry's bellwether names may be overdone when taking into consideration their steady business models and inelastic category demand.

Stocks in the space have rallied following the Group of 20 (G-20) weekend meeting in Japan, where U.S. President Donald Trump and his Chinese counterpart President Xi agreed to a temporary ceasefire on imposing a fresh round of additional tariffs and indicated that the two economic superpowers plan to reopen trade negotiations. The mini trade war breakthrough comes six weeks after Washington agreed to postpone duties on auto parts for up to six months.

Traders who wish to play the recent strength in leading auto parts stocks should consider adding these three names to their watchlist. Let's look at each in further detail and determine what technical levels open the door to possible trading opportunities.

O'Reilly Automotive, Inc. (ORLY)

Springfield, Missouri-based O'Reilly Automotive, Inc. (ORLY) engages in the retail of automotive aftermarket parts, tools, supplies, equipment, and associated accessories in the United States. The auto parts retailer sells branded and private branded products to both professional and do-it-yourself (DIY) customers through its 5,219 stores. O'Reilly's earnings per share (EPS) growth from $1.64 in 2008 to $16.10 in 2018 demonstrates the company's management and stable business model. Given that the specialty retailer has 35% of its merchandise exposed to tariffs, the weekend's G-20 developments bode well for the company. As of July 3, 2019, O'Reilly Automotive stock has a market capitalization of $29.99 billion and is up 11.26% year to date (YTD).

O'Reilly shares have traded sideways since gapping lower on April 25 after the company missed analysts' first quarter top- and bottom-line expectations. However, the stock's bullish trend remains intact, with the 50-day simple moving average (SMA) positioned above the 200-day SMA. Buyers stepped up to the plate Tuesday, pushing the price more than 2% higher toward the top of its current range. Those who take a trade here should set a take-profit order near the stock's all-time high at $414.63. Consider cutting losses if the price fails to hold above the July low at $371.10. The trade offers a risk/reward ratio of 1:2.63 (risk of $11.99 vs. reward of $31.54), assuming a fill at yesterday's $383.09 closing price.

Chart depicting the share price of O'Reilly Automotive, Inc. (ORLY)

Advance Auto Parts, Inc. (AAP)

Advance Auto Parts, Inc. (AAP) sells aftermarket automotive parts, tools, and accessories to professional installers and DIY customers across its 5,109 retail stores situated throughout North America. The 90-year-old auto parts specialist grew same-store sales by 2.3% in 2018 and expects to register growth between 1% and 2.5% this year. Advance Auto Parts surpassed the Street's first quarter earnings and revenue estimates by 4.24% and 0.42%, respectively. Analysts expect full-year earnings growth to come in at 15.35%. Trading at $159.79 with an $11.46 billion market cap, the stock has gained 1.56% on the year as of July 3, 2019.

The Advance Auto Parts share price closed its May 22 earnings gap the following trading day and continued its decline over the next six weeks. It started July by breaking above a trendline that dates back to mid-April. Traders may continue to bid the price up in the short to mid-term, relieved that the company's 35% of goods exposed to tariffs received a reprieve for the time being. Those who take a long position should bank profits on a move to significant resistance at $182.50. Manage risk by placing a stop under the July 1 low at $155.57 and amending it to the breakeven point if the price rallies above the 200-day SMA.

Chart depicting the share price of Advance Auto Parts, Inc. (AAP)

Genuine Parts Company (GPC)

Genuine Parts Company (GPC) distributes automotive replacement parts to commercial and retail customers through more than 9,400 stores worldwide. The $15.29 billion company, which issues a dividend yield of nearly 3%, also sells a range of industrial parts and office products. Genuine Parts increased its global reach in 2017 when it acquired Alliance Automotive Group, a major European player in auto parts, for $2 billion. Despite the company missing analysts' first quarter revenue projections by $60 million, its top line still registered year-over-year growth of 3.3%. Genuine Parts stock is trading up 10.58% YTD as of July 3, 2019.

The company's chart shows a mountain-like pattern over the first half of 2019, with the price trending sharply higher between January and March before descending rapidly throughout April and most of May. The price crossed back above the 200-day SMA in June and has kicked off this month by breaking above a period of month-long consolidation. Traders who play the breakout could exit at either $110 or $114, both key levels where the price may encounter resistance from previous swing highs. Think about setting a stop-loss order under May's consolidation area at the $102 level.

Chart depicting the share price of Genuine Parts Company (GPC)
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