Cash > Crash

Defensive investing to avoid accidents...

Written by Jimmy Mengel
Posted October 19, 2021

Dear Outsider,

A lot of bad things can happen in three seconds...

I learned that the hard way this week as I was driving my kids to the Mount Everest restaurant, the three of us eagerly awaiting some delectable Nepalese cuisine. This particular restaurant is only about a mile from my home. So we piled into my Jeep and took off down the road, which goes through a sleepy residential neighborhood with a speed limit of 25. I am always cautious enough to abide by speed limits that low.

That admission will become relevant shortly.

Barely a minute into the drive my kids did as kids do and began some light bickering in the back seat. I let it go for a moment, but eventually lost my cool and turned back toward them to plead, “For the love of God, please…”

It was at the “please” that I slammed my Jeep into the side of a massive Chevy pickup truck that was precariously parked, sticking out several feet into the road. Metal on metal can be incredibly destructive, even at 25 miles per hour. My face hit the steering wheel and my nose began gushing blood. I quickly parked the wounded Jeep and made sure my kids were safe. Thank God, they were completely fine; a bit rattled for sure, but no injuries whatsoever.

I then approached the owner of said pickup, who obviously heard the thunderous smash, and we exchanged information while we waited for the police and ambulance to arrive.

Here’s where we get to investing...

After my car was towed, the real problems began. I called around to the local body shops to see when I could bring the Jeep in for repairs. Time after time I heard, “We’re not taking new vehicles now” or “We can fit you in, but it won’t be until early November.”

This was obviously not ideal (especially considering the inflated rental car prices right now).

I knew about — and have written about — supply chain problems in the past. Automakers and auto repair shops are having an immense bout of trouble getting all kinds of parts and raw materials. Much of that has to do with COVID-related plant shutdowns by suppliers. It also has to do with the more logistical problems, like the shortage of ships, shipping containers, and truck drivers and the very real difficulty that some suppliers are having filling jobs.

That's making the cost of the current supply chain crisis much larger than earlier estimates.

It's resulted in automakers building 7.7 million fewer vehicles than they would have if they could have gotten the parts and raw materials they needed. 

Estimates in May anticipated around a 3.9 million vehicle shortfall.

It isn’t just the boutique components like semiconductors. It’s the nuts and bolts of a vehicle, everything from steel for frames to titanium dioxide for paint. 

But there is a solid way to play the automotive industry, and it isn’t buying stock in car companies themselves. As you know, I’m a big fan of picks-and-shovels plays that tend to weather these storms better than the final product itself.

Today, I’m talking about auto parts.

Personal consumption of auto parts reached an all-time high of $50 billion in June of last year. With the availability of coronavirus vaccines and traffic coming back to pre-COVID levels globally, auto parts stocks are only going to grow.

Enter AutoZone Inc. (NYSE: AZO).

AutoZone is the nation's leading retailer and a leading distributor of automotive replacement parts and accessories with more than 6,000 stores in the U.S., Puerto Rico, Mexico, and Brazil. Each store carries an extensive line for cars, sport utility vehicles, vans, and light trucks, including new and remanufactured hard parts, maintenance items, and accessories.

AutoZone has an exceptional growth record. It has also proved extremely resilient to the pandemic, as it has posted record earnings in each of the last two years.

Over the last decade the stock has rallied 390%, crushing the S&P 500 (up 269%).

It’s up 46% this year and is expected to keep growing.

In the first 36 weeks of fiscal 2021, which ended in August 2021, AutoZone grew its revenues and its earnings per share by 20% and 46%, respectively, to new all-time highs. It has also had an aggressive stock buyback program that should help the company’s EPS grow in the future. AutoZone authorized a buyback of an additional $1.5 billion of common stock, and has done so to the tune of $27 billion over the past decade. It also has a P/E ratio around 18, which is better than the 20-plus average for most stocks of its kind. 

I'm adding AutoZone as a defensive play to the long-term Crow's Nest portfolio. Unfortunately, it does not offer a dividend. But I think as a slow growth stock, it’s the perfect addition to any portfolio that is betting on some sort of market correction. As its famous tagline goes, "Get in the Zone, AutoZoneeee..."


Market Cap: $37.2 billion

52-Week Range: $1,085.85–$1,767.88

P/E Ratio: 18.48

EPS: 95.19

Average Volume: 162,529

PS: I also wanted to share some interesting research my friend and colleague Alex Koyfman has just released. He's uncovered a technology that could unlock an unlimited supply of cheap, zero-emission fuel. And it doesn't use batteries, hydrogen, bioethanol, or nuclear fusion. It has been described as the "foundation stone of modern existence" and "one of the greatest inventions of the 20th century."

Without it, almost half the world's population would not be alive today, which is why the scientist behind it won the Nobel Prize.

I didn't even realize how valuable it was to the future of energy until Alex told me about it himself.

This is a universal fuel, and — as long as it's not like mine is currently — you may be powering your car with it soon. 

You can learn more about it right here.


Jimmy Mengel

follow basic @mengeled on Twitter

Jimmy is a managing editor for Outsider Club and the investment director of several personal finance advisories, The Crow's Nest, and The Adventure Capitalist For more on Jimmy, check out his editor's page.

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