Advance Auto Parts (AAP) – Closing Short Position – down 13% vs. S&P up 29%
We originally put Advance Auto Parts (AAP: $139/share) in the Danger Zone on December 17, 2018 because it had greatly outperformed in 2018, but looked overvalued going forward. This report, along with all of our research, utilizes our “novel dataset”[1] of footnotes disclosures to get the truth about earnings, as shown in the Harvard Business School and MIT Sloan paper, “Core Earnings: New Data and Evidence.”
At the time of the report, AAP earned a Very Unattractive rating. Our short thesis pointed out the firm’s misleading GAAP net income, declining return on invested capital (ROIC), and overvalued stock price.
During the 408 day holding period, AAP outperformed as a short position, falling 13% compared to a 29% gain for the S&P 500.
Since our article, AAP’s after-tax operating profit (NOPAT) has grown significantly, and its ROIC has improved from 7% in 2017 to 10% TTM. The company’s improved fundamentals, combined with its lower valuation, means the risk in this stock has decreased. We believe it is time to take the gains and close this short position.
Figure 1: AAP vs. S&P 500 – Price Return – Successful Short Call
Sources: New Constructs, LLC and company filings
Note: Gain/Decline performance analysis excludes transaction costs and dividends.
This article originally published on January 30, 2020.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
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[1] In Core Earnings: New Data & Evidence, professors at Harvard Business School (HBS) & MIT Sloan empirically show that our “novel dataset” is superior to “Street Earnings” from Refinitiv’s IBES, owned by Blackstone (BX) and Thomson Reuters (TRI), and “Income Before Special Items” from Compustat, owned by S&P Global (SPGI).