AutoZone Is Headed for a Near-Term Breakdown: Time to Short

Includes: AZO, PBY
by: Brian Bleifeld

After six months of searching I have finally found a stock worth shorting. This stock is the very hot AutoZone (NYSE:AZO). I know that most people will call me crazy as this is one of the few stocks hitting 52-week highs in recent weeks but the price is just too much hype.

I understand the 'follow the herd' mentality on this one. People are not buying new cars and must keep their old cars running. Therefore, AutoZone and other auto parts sellers are receiving support from the market.

As Charles Rotblut commented in his March 5th article 'Three Retail Stocks to Consider':

“The company is benefiting from the decline in car sales. Consumers are keeping their cars longer and, as a result, are spending on maintenance. (After all, it's hard to get a job if you can't make it to the interview.)”

On the surface this seems like a reasonable idea. The problem is that a large percentage AutoZone's and other auto parts supplier revenue streams come from high margin items which are very discretionary. Buying AutoZone at this time is a mistake as it is overvalued and one of the following two following scenarios will knock it off its high soon.

The price of gasoline is going up. The Chinese and US stimulus packages will work in concert to build demand for gasoline used in construction. The independent oil producers which had in the past used leverage to maintain project spending will not be able to borrow their way into production due to the global credit squeeze. This rise in gasoline prices will lead people to drive less which will hurt the basic automotive parts business. The economic meltdown will cause people to not be able to afford the chrome tipped exhausts offered by AZO even at the low price of $627.99.

One can almost chart the success of AutoZone in the post-recession era by looking at the inverse of gas prices chart as Dan Schmeidler pointed out in his AutoZone: No Repeat article from March 6, 2009.

The stock will get hammered during the inevitable run up of gasoline prices due to the coming dollar devaluation and oil supply shortage.

Is AutoZone a good company?

I believe fundamentally, yes it is.

Am I kicking myself for not getting into the action at less than $100 a share?

Of course AutoZone was undervalued a few months ago.

Would I buy AutoZone now?


If you are a short term trader and own the stock, take your gains now.

If you are a short term trader and do not own the stock, short it now.

If you are a long term investor, keep the stock.

If you still think that the auto parts sector play is for you, I would go with Pep Boys (NYSE:PBY), which has more automotive repair capability and has not had the run up AutoZone has.

Disclosure: None