When contemplating remarkable stocks, it’s easy to fixate on the renowned “Magnificent Seven” tech giants known for their innovation and stellar returns over the past decade.
However, there are two comparatively less flashy yet remarkably successful companies that have significantly outperformed the market. These are O’Reilly Automotive (NASDAQ: ORLY) and AutoZone (NYSE: AZO). O’Reilly has surged by 678% in the last 10 years, while AutoZone has seen a 498% increase over the same period.
The question arises: Should one consider investing $100 in these soaring retail stocks and holding onto them through 2024 and beyond?
Steady wins the race
While lacking in excitement and disruptive potential, both O’Reilly and AutoZone have proven to be immensely rewarding for investors.
Operating extensive networks of stores, these companies specialize in selling aftermarket car parts and supplies to both DIY enthusiasts and commercial customers. Their success hinges on catering to consumers with vehicles beyond the original manufacturer’s warranty, a market that grows as the average age of vehicles on the road increases along with miles driven.
Essentially, O’Reilly and AutoZone thrive when there’s greater wear and tear on vehicles. Given the indispensable role of functioning automobiles in people’s daily lives—for tasks ranging from errands to school runs to work commutes—these companies enjoy a level of resilience, making them somewhat recession-proof.
This quality is invaluable for investors, as it means you don’t have to accurately predict economic fluctuations. Regardless of market conditions, these companies are positioned to perform well.
Capital returns
With stable demand regardless of economic shifts, both O’Reilly and AutoZone have demonstrated their ability to generate substantial profits and cash flow. In their last fiscal years, O’Reilly pulled in $2 billion in free cash flow, while AutoZone brought in $2.1 billion—a testament to their financial robustness.
Despite not paying dividends, both companies pursue aggressive share buyback programs. Over the past five years, amid disruptions like the pandemic, supply chain challenges, inflation, and higher interest rates, O’Reilly reduced its share count by 26%, while AutoZone decreased theirs by 30%.
For current investors, this strategy proves advantageous as it bolsters earnings per share and increases shareholders’ ownership stakes over time without requiring any action on their part. This dynamic is a significant financial advantage.
Furthermore, what’s particularly encouraging is that these capital-return policies follow investments in growth initiatives. After allocating resources to open new stores or distribution facilities each year, the companies turn to share buybacks, which should contribute to even greater revenue and earnings in the long term.
Is the price right?
Given the overall market’s record-breaking performance, it’s no surprise that both O’Reilly and AutoZone are also hovering near all-time highs. In line with their solid business performances, these stocks continue to reward investors.
However, it’s worth noting that they might not be trading at bargain prices. Both stocks are currently selling at some of their highest price-to-earnings (P/E) ratios in the past decade. This suggests that the market is quite optimistic about their future prospects.
When considering whether to invest, it’s crucial to assess your stance on valuation. While it would be preferable if O’Reilly and AutoZone were trading at lower P/E multiples, it’s essential to weigh the potential gains against waiting on the sidelines. One approach could be to allocate $50 to each of these stocks and maintain a long-term investment perspective.
