As recession risks rise and consumer spending habits shift, MKM partners highlighted the need for a less-discretionary focus. Among these names, Autozone ( NYSE: AZO ), Advance Auto Parts ( NYSE: AAP ), and O’Reilly Automotive ( NASDAQ: ORLY ) were touted as top picks.
Equity analyst David Bellinger explained in an initiation note that the outsized pricing power of auto parts retailers should protect their bottom line amid inflationary pressures. Additionally, he indicated that consumers spending is merely “rebalancing across recently outperforming categories” and “normalizing” rather than pulling back indiscriminately.
“We do not necessarily see the beginnings of a spending death spiral given where consumer balance sheets have gone, at least not yet,” Bellinger clarified. “Investors are now requiring a higher bar into 2H22 in terms of quality, with a sharpened focus on profitable growth and steady cash flows as the Fed's tightening cycle takes shape.”
In terms of Fed policy, Bellinger told clients the current cycle makes more rate-sensitive home improvement stocks less attractive. While Home Depot ( HD ), Lowe’s ( LOW ), and Floor & Decor ( FND ) were not considered low-quality by any means, their exposure to adverse macro factors left Bellinger “Neutral” rated on each of the newly-initiated names.
“We recommend clients rotate into the more defensive, highly cash-generative auto parts group with [O’Reilly Automotive] ( ORLY ) our top pick, followed by [AutoZone] ( AZO ), and [Advance Auto Parts] ( AAP ) as we see more secular factors outweighing higher fuel prices,” Bellinger concluded. “We remain sidelined on home improvement names [Home Depot] ( HD ), [Lowe’s] ( LOW ), and Floor & Decor ( FND ) as the impacts of higher rates trickle into fundamentals.”
Read more on Wells Fargo’s similar picks for playing defense.
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AutoZone, O’Reilly Automotive among top picks at MKM as consumer spending shift