This last week I taught my son, Henry, a lesson on getting back to basics. We packed up everything we needed to survive for a few days and headed out to the Jefferson Wilderness. This was Henry’s first-ever backpacking trip. We hiked into Pamelia Lake, which is something Bruce and I did when I was a kid.
The best part of the trip was the scenery. Not the trees, lakes and peaks, but watching Henry’s face light up at every small stream, funny rock, or pesky chipmunk we came across. All in all, I think he liked the experience because I caught him bragging to his cousins, “…no other five year old could’ve hiked ten miles in one day like me.” Something I may, or may not, have mentioned to him.
My experience with Henry can also teach us about investing. Value can be found in areas that are sometimes forgotten. An example of this can be seen from the Growth portfolio this month. Matthew Coffina, CFA from Morningstar ditched the online payment processor Paypal PYPL for a nice gain. He instead bought the more traditional, not online, retailer O’Reilly Automotive ORLY. This is an interesting move away from the hot technology stocks and into the more basic industry of brick and mortar retail.
Coffina’s decision was not based on large macroeconomic trends but company specific information. He believed even though PYPL had risen sharply (about 80% from when we first bought it) the price of the stock was now too high and due for a pullback.
In contrast, he considers ORLY to be undervalued after a recent earnings report showed a slowdown in earnings and sent the stock down sharply, now down 30% from its highs. The fear is that online sales, largely from Amazon.com, took a bite out of the auto parts business last quarter. Coffina thinks this to be an exaggerated concern and cites mild winters, delayed tax refunds and newer cars on the road as the reason. Not Amazon.
As someone that works on his own cars, I still prefer to buy car parts in the store rather than online. There are so many things that can go wrong on a repair; I find it’s still nice to talk through the job with someone behind the counter. Another advantage these traditional stores offer, like O’Reilly and Napa – owned by Genuine Parts GPC in the Income portfolio – is the ability to rent specialty tools that customers may only need to use once.
Amazon may still be a threat to these retailers, but the auto parts stores do have a service component that’s difficult to replicate. For these reasons we agree with Coffina’s assessment, “…while investors will need to be vigilant about Amazon, I think there’s a good chance that O’Reilly’s financial results will bounce back later this year and into 2018.”
Jeremiah Forrister
In other news, I’m extremely excited to announce a new addition to the SMB Financial Services team. Jeremiah Forrister joined us July 1 as an Investment Advisor Representative. He’ll also be answering the phones here and helping us with other administrative tasks as he learns the business and starts to build his own book of clients to serve.
Jeremiah has a lovely wife, Alicia, and two nine-month twins, Elias and Ember. He finished college in 2013 and worked his way up to a supervisor role at Costco before transitioning into the financial services business. We’re happy to have Jeremiah’s help around the office and look forward to introducing him to you in the future.
Thank you for reading. Please don’t hesitate to contact us if you have any questions.
Tim Porter, CFP®