The Focus List Stocks: Long Model Portfolio outperformed the S&P 500 by 35% in 2021. This report examines a Focus List Long stock that outperformed in 2021 and is positioned to outperform again in 2022.
AutoZone Inc. (AZO) outperformed in 2021 and still presents quality risk/reward.
Priority List stocks outperformed in 2021
The Focus List Stocks: Long Model Portfolio contains the “best of the best” of my long ideas and leverages superior fundamental data, which provides a new source of alpha.
Focus List Stocks: Return of the Long Model Portfolio,on average, 58% in 2021 compared to 23% for the S&P 500, according to Figure 1.
Figure 1: Priority List Stocks: Long Model Portfolio Performance for Period Ending 4Q20 to 4Q21
Since my company’s list of targeted stocks: long model portfolio represents the best of the best choices, not all long ideas make it into the model portfolio. I posted 66 Long Ideas in 2021, but only added six to the Focus List Stocks: Long Model Portfolio during the year. Currently, the Focus List Stocks: Long Model Portfolio has 39 stocks.
Figure 2 shows a more detailed breakdown of the performance of the model portfolio, which encompasses all stocks that were in the model portfolio at any time in 2021.
Figure 2: Performance of stocks in the target list Stocks: long model portfolio in 2021
The performance includes the performance of stocks currently in the Focus Stocks: Long Model Portfolio list, as well as those removed during the year, which is why the number of stocks in Figure 2 (45) is greater than the number in actions currently in the model. Wallet (39).
Priority list stocks outperform: AutoZone (AZO): +77% vs. S&P 500 +27% in 2021
I added AutoZone to the Focus Stocks: Long Model Portfolio list in November 2019, and the stock has outperformed the S&P 500 by 50% in 2021. Despite strong gains in 2021, I see more upside in the stock then that the company is positioned to extend its earnings growth for decades even further.
Main reason for outperformance: commercial and retail demand for used cars: In a year plagued by new-vehicle supply issues, demand (and prices) for used cars, which require more maintenance, have soared. AutoZone is positioned to benefit from such growth in the retail and commercial markets. AutoZone has successfully leveraged its retail store presence to drive sales growth in its retail business, and by fiscal 1Q22, the company had expanded its national wholesale program to 86% of its retail markets.
According to Figure 3, AutoZone’s strong domestic revenue growth has led to market share gains. Every year since fiscal 2018, the company has grown sales in domestic stores faster than the U.S. auto parts market.
Figure 3: Annual Sales Evolution: AutoZone Vs. Total US Market
Why AutoZone Stock May Rise: The Supply Network Is Increasingly Valuable: AutoZone relies on its extensive store network and customer service to grow its retail and business operations. The company’s larger stores serve as both retail outlets and distribution centers that allow smaller stores to carry larger inventory. This fulfillment network creates a growing chasm for the business that is difficult to replicate, especially given the limited warehouse supply.
Additionally, long-term tailwinds are supportive for the auto repair market. The average age of vehicles on U.S. roads has steadily increased from 9.6 years in 2002 to 12.1 years in 2021. Older vehicles drive increased demand for auto parts as vehicle repair costs have tend to increase as cars age.
The company’s sustainable business model has also enabled it to improve its profitability. AutoZone’s ROI over the past five years has grown from 22% in FY17 to 34% TTM.
It should also be noted that AutoZone reports the truth about its earnings. The company’s GAAP profit of $2.3 billion on TTM is equal to its base profit. Companies that tell the truth about their earnings are more likely to outperform the market.
Price for permanent decline in profits: AutoZone’s price to economic book value (EPBV) ratio is 0.8. This ratio implies that the market expects AutoZone’s earnings to decline permanently by 20%.
Below I use my inverse discounted cash flow (DCF) model to analyze future cash flow growth expectations embedded in the current AutoZone stock price.
In this scenario, if I assume that AutoZone:
- NOPAT margin drops to 15% (five-year average vs. 17% TTM) from fiscal year 2022 to 2031 and
- revenue drops 1% (compared to consensus expectations for a CAGR of 5% from fiscal year 2022 to 2024) compounded annually from fiscal year 2022 to 2031, then
AutoZone’s NOPAT drops 4% compounded annually over the next decade, and the stock is worth $2,000/share today, the equivalent of today’s price. Discover the calculations behind this reverse DCF scenario. For reference, AutoZone has increased NOPAT by 11% compounded annually over the past two decades.
Stocks could reach $3,300 or more: If I assume that AutoZone:
- NOPAT margin drops to 16% (three-year average),
- revenue grows at a CAGR of 5% (equal to consensus expectations) from fiscal year 2022 to 2024, and
- revenue grows 3% (below its 10-year CAGR of 6%) each year thereafter through FY2031, then
the stock is worth $3,300/share today, or 65% above the current price. Discover the calculations behind this reverse DCF scenario. In this scenario, AutoZone increases the NOPAT by 3% compounded annually over the next decade.
Over the past decade, AutoZone has increased NOPAT by 9% compounded annually. If AutoZone increases earnings closer to historic levels, the upside is even greater.
Figure 4: AutoZone historical and implied NOPAT: DCF assessment scenarios
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific stock, industry, style, or topic. Performance represents the price performance of each stock during the period it was on the Focus Stocks: Long Model Portfolio list in 2021. For stocks removed from the Focus list in 2021, performance is measured from the start of 2021 through the date the ticker was removed from the focus list. For stocks added to the Focus list in 2021, performance is measured from the date the ticker was added to the Focus list through December 31, 2021.  The performance includes the 1745% rise in GME’s share price during its move to the priority list in 2021.