By: Bill Spencer — September 21, 2019
Big Bill here.
Welcome to Small-Cap Saturday. Let's get right to it...
There's nothing exotic about the company you're going to read about today. They're not out to cure cancer or conquer space...
They just sell cars; lots of them.
So many in fact that...
The company also pays a dividend of $0.30 per share, a 1.00% yield).
Analysts have a 12-month high price target about 20% above the current share price, and I actually agree with that number -- as a low price target. My high target is closer to 45%.
On top of that, today you'll also be getting a special bonus trade which could raise your potential gains to 112%. Details below.
The stock is in the Auto & Parts sector, a subset of Consumer Discretionary.
The stock and the sector both look strong across the board, as you can see in Sector Prophets, our proprietary data program.
(Click any image to enlarge)
The sector is beating the market while the stock beats both the market and its sector peers.
The firm itself beats earnings estimates with almost monotonous regularity. After they beat the Street in July shares jumped 21%, and I think they'll repeat that performance a month from now, when they report Q3 results.
The stock trades at a P/E multiple of 11.30. Right now that's 12% below the P/E for the broad Consumer Discretionary sector (12.89).
In other words, the stock is undervalued.
If you're a "regular" here at True Market Insider, then you’re probably well versed in sector trading and you probably know that more than 75% of a stock's move is due to its sector.
Right now the Auto & Parts sector's BPI chart is saying Demand is in control in the short-term AND in the long.
You can see that strength displayed at the column of X's at the far right.
That the chart is in X's indicates shorter-term strength. It means that a significant number (6%, minimum) of stocks in the sector have broken above key resistance levels.
For that to happen, investors would have to be buying shares hand-over-fist -- thus driving up prices.
And notice that the two X's are above the highest X in the previous X column, meaning that more stocks are participating in this new move higher than participated in the previous one.
This puts the chart on "bull confirmed" status -- the strongest designation there is.
What's more, this BPI shows a "field position" of 50, which "puts the ball at midfield". The bulls have a lot of room to run before hitting high-risk territory.
Lithia Motors (NYSE:LAD) is the third largest automotive retailer in the United States. The company offers 28 brands of new vehicles through its 183 centers in 18 states, and more than 200 websites.
Since 2014 Lithia has pursued an aggressive strategy of growth-through-acquisition. Since buying DCH Auto Group in 2014, the company has grown from 101 dealerships to the 183 it operates today -- an 81% increase in five years.
CEO Bryan DeBoer told investors last year that his firm's long-term strategy is "to buy what we call strong assets that really haven't performed to their potential. That's the same story that we plan on running into the future."
Lithia generates its eye-popping revenue through four segments -- New Vehicles, Old Vehicles, Parts & Service and Financing and Insurance.
On July 24th LAD reported the highest Q2 revenue (+$3.2 billion) and highest earnings per share ($2.95) in its 73 year history.
LAD is up 89.5% since its December correction low. As you saw, after trouncing analysts' projections in late July, the stock shot up 21%, and throughout August the stock has traded in a range between around $126 and $135.
Here's the same 1-year price chart...
Notice how upward moves (34% and 21%) happen on very heavy volume. That tells me bulls have a lot of conviction behind their purchases.
And see the purple circles? That's where the price bounced off the blue 10-Week (50-Day) Moving Average support line.
This says the bulls are serious about keeping this stock above that key support level. Whenever the stock pokes below that blue line, the bulls don't allow computers to kick in and initiate any automated selling, which would drive down the price.
No, for the past seven months the bulls have stood like a wall, always buying enough LAD to protect the price.
Conclusion? Institutions want to drive this baby higher.
How high? We don't want to predict...
But the company has beaten estimates by an average 9% over the past two quarters. If they repeat that performance, I think EPS ($3.10 according to the consensus view) rings in closer to $3.55 - $3.65 for the quarter, or $14.20 - $14.60 annualized.
Using the current P/E multiple of 11.30 as base, we see that translates into a share price of $160 - $165. That's a gain of between 23% and 27%.
But recall that the P/E for the Auto & Parts sector as a whole is 12.89. If LAD trades closer to that multiple, say 13.0, then the stock could hit $188, and we could bank a 45% winner.
Lithia Motors trades for around $130 - possibly a little rich for some investors.
So here's an options play -- hand-picked by Costas Bocelli -- that lets you capture any upside in the stock for a fraction of the cost.
Costas Bocelli spins out high-gain, high-probability options trades to readers of his Profit Skimmer trading service. Costas isn't just one of the best options traders on the planet, he's also a team player.
So when I mentioned I was over the moon about LAD he offered to work his magic. He told me...
"Bill, have your folks buy the March 110 Call for $26 with the stock trading for $130. That's an 80% discount to buying the straight stock.
"If the stock hits your conservative price target of $165, they could make a return on investment of at least 112%".
Alright, that's enough out of me.
Have a great week friends,