This Stock Is on the Road to Riches

by Sean Brodrick
auto stocks

Consumer spending has shifted into high gear.

According to data from the Federal Reserve Bank of Atlanta, personal consumption expenditures will rise an annualized 4.5% in the second quarter. That's the highest amount of growth since the first quarter of 2006.

Naturally, everyone is trying to figure out how to grab a slice of the consumer pie. I have an opportunity for you today that seems to have slipped past Wall Street’s radar.

Rising incomes and an improving job market are a 1-2 combo that have drastically boosted consumer spending. Let me add a third force to the mix: Cheap gas.

The U.S. spent $991 million per day on petroleum products last year. That’s the lowest daily total since 2008. But it doesn’t mean we’re driving less. Just the opposite, in fact...

According to the Federal Highway Administration, travel on all roads and streets is up an average 2% from 2015.

By year’s end, the EIA says motor gasoline consumption will rise 1.5%, or 130,000 barrels per day, to hit 9.29 million bpd. If so, it will be the greatest annual amount of gasoline consumed on record.

So Americans are clearly driving more, wearing out their cars. And that, combined with a bevy of disposable income, is sending car sales through the roof.

[Editor’s Note: Our Research Analyst Brian Kehm covered the dark side of this trend - the rise in subprime auto loans - here. If you’re thinking about pulling the trigger on a new Mustang, you may want to read his comments first.]

So far this year, total vehicle sales are on track to hit about 17.6 million, according to Autodata. That would surpass last year’s record peak of 17.4 million cars sold in the U.S.

Looking forward, annual auto sales should hit 20 million by 2018.

This trend is certainly reflected in the performance of the big automakers. General Motors (NYSE: GM) and Ford (NYSE: F) are 37% and 40% off their lows, respectively. And with those stocks breaking out, I don’t blame anyone for buying them. But there’s a better deal over in the “used” section of the lot...

I’m talking about CarMax (NYSE: KMX).

It’s the biggest used car dealer in the country and the only one with a national brand. It has 162 locations and plans to open 17 more stores within the next year. Some Wall Street analysts even say CarMax could eventually double its number of stores.

That’s important because CarMax has low growth in its same-store sales. For now. The surge in new car sales is dragging on used car sales. But what goes around comes around...

CarMax’s sales cycle comes after the big, new-car sales. So if you want to invest with an eye beyond 2018, CarMax could be the ride you’re looking for.

That’s because CarMax offers no-haggle pricing on products that have been rigorously reconditioned and certified. Back when I was younger, it offered a night-and-day difference when compared to a regular car dealer.

(But that was when I was young, handsome, and bad at making deals. Now I’m older, I have a fatter wallet, and I haggle like a demon bargaining for a soul. Car salesmen get indigestion when I walk on the lot...)

CarMax is aimed at people who want good, reliable used cars at a fair price. And while it has an internet presence, there’s still plenty of growth potential in that area. The company is just starting to offer online financing to customers. That should help drive profits.

Another perk for investors? CarMax does stock buybacks. During the first quarter, the company spent $132 million to repurchase 2.6 million shares. As of May 31, it had $1.27 billion of authorization remaining under its share repurchase program.

Share buybacks always provide a “floor” for stocks. But right now, CarMax doesn’t need to worry about the floor...

It’s too busy driving through the ceiling.

carmax auto stock

As you can see, CarMax just broke through overhead resistance. Normally when this happens, you’d expect the stock to tap the brakes. But CarMax has kept its foot on the accelerator and is aiming straight for the next level of resistance at $59.

This stock is on the road to $80 a share - maybe higher.

Good investing,

Sean

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