Other companies, like AutoNation Inc (NYSE:AN), Group 1 Automotive (NYSE:GPI), Penske Automotive Group (NYSE:PAG) and Sonic Automotive (NYSE:SAH), have tried to mimic CarMax's business model in the past and failed, leading us to believe the company has carved out a competitive moat. This leg up on the competition will allow CarMax to expand profitably once macroeconomic conditions improve.
In 2010, U.S. light vehicle sales volume rebounded 11%, to nearly 11.6 million. For the automotive retailers sub-industry, S&P believes that the bottom has been reached in the current sales cycle. We agree, and place a price target of $37 on the stock, which offers significant capital appreciation.CarMax currently operates 104 used car superstores in 50 markets.
For interested buyers, we suggest a covered call strategy. We like the July and October 2011 sold calls and January 2012 sold calls. These permit 7-8% appreciation over one to seven months, and a synthetic yield of 2% in one month to 12% in seven months, respectively.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.