On July 5, 2017, O’Reilly Automotive (ORLY) crashed on news that same store sales declined –1.70%. At the time, much of the concern was that ORLY was going to become a victim of Amazon.com as online sale were being eroded by the online retail giant.
“what's happening right now in terms of sentiment within retail stocks is no one wants to discount the power of Amazon anymore."
"While (O'Reilly) blamed the mild winter and weak demand, we think this exacerbates concerns about encroachment from Amazon.com, which is dragging down other parts retailers too"
In this review, we take a look at our analysis of O’Reilly and the performance of the stock price one year later.
The first assessment that we made was on the Speed Resistance Lines [SRL] based on the work of Edson Gould. At the time, we said the following:
“The July 5, 2017 decline easily broke through the conservative downside target of $177.53. The expectation at this point is that ORLY should at least touch the ascending $135.57 level before any pronounced appreciation of the share price.”
The chart below highlights the actual performance of ORLY.
Based on the SRL, the actual performance of ORLY was that it did not decline to the ascending $137.57 level.
The second factor that we focused on was the Coppock Curve. This indicator suggested that any time the stock price declined below a specific level and then rebounded, the stock was considered a “buy.” We had the following to say at the time:
“With the stock below $180, there is a clear advantage to considering ORLY at this point in time, given the overwhelming data against purchasing at the “buy” indicator since 1995.”
It was our view that with the stock price well below the Coppock Curve typical “buy” level at $242, anything less than $180 was an enormous opportunity. We closed with what we hoped was a simple conclusion on ORLY:
“The decline of over –40% from the peak indicates that analysts need [to] distinguish the difference between the default rationale [knee jerk reaction] of Amazon.com (AMZN) being a threat or a regular cyclical/secular decline in sales/earnings after an uninterrupted 8-year economic recovery.”
Fast forward to one year later and we see ORLY trading at +74% above the $180 level and +77% above the low that was set in July 2017.
We can’t emphasis enough that making the right distinction about why a stock has declined –20% or more in a single trading day can alter the risk/reward assessment and ultimately the investment decision. In the case of O’Reilly, a cyclical change in the trend had more to do with the decline that Amazon taking away their market.