Banking

Top IBD 50 Car Dealer Cruises Toward New Entry

Sonic Automotive (SAH), featured in today’s IBD 50 Stocks To Watch, is approaching a new buy point as pandemic-related demand boosts car sales.




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The Charlotte, N.C.-based company is one of the biggest car sellers in the U.S. Its two operating segments are made up of franchised dealerships and EchoPark Automotive, which uses technology-enabled sales strategies to offer 1- to 4-year-old used cars.

On Tuesday, Sonic opened a new EchoPark Delivery Center in the New Orleans area. And late last month, it said it’s acquiring RFJ Auto Partners, which Sonic expects to add $3.2 billion in annualized revenue.

On July 29, Sonic delivered Q2 earnings and sales that beat Wall Street targets. It announced record quarterly revenue of $3.4 billion, up 59% on a year-over-year basis. Record quarterly earnings of $2.63 per diluted share surged 311% from the prior year.

“These results reflect the strong consumer demand environment we’ve seen across all of our business lines since the latter part of 2020,” CEO David Bruton Smith said on the earnings call. “We are confident that our strong operating performance can be sustained throughout the balance of 2021 and well into 2022, and we are well-positioned to grow total annual revenues to $25 billion by 2025, while continuing to significantly increase our profitability.”

Stocks To Watch: Top-Notch Ratings

IBD Stock Checkup assigns Sonic a highest0possible 99 Composite Rating, which gives investors a quick way to gauge a stock’s key growth traits. That puts it at the top of the 26-stock automotive retail/wholesale group, which includes fellow IBD 50 members AutoNation (AN) and Penske Automotive Group (PAG).

Sonic’s 98 Earnings Per Share Rating also places it among the group’s top stocks to watch. It reflects a five-year compound earnings growth rate of 21%. Analysts expect EPS to surge 102% this year and climb more slowly 6% the next. Profit growth stepped up the past two quarters, from 55% to 208% to 311%. Sales gains also accelerated during the same period.

On the technical side, an 83 Relative Strength Rating means Sonic is beating 83% of all other stocks. The relative strength line, which compares a stock’s performance with that of the S&P 500, is getting closer to a 52-week high. A move to new highs at or ahead of a breakout would be a bullish sign.

Revving Up Near Entry?

Sonic is working on a cup with handle with a 58.10 buy point, according to MarketSmith chart analysis. It’s about 5% away from the entry. The stock has formed a series of bases this year but hasn’t advanced 20% between breakouts, and the stock certainly doesn’t look too far gone. So the current cup base is first stage — and stocks often make their biggest runs out of such early-stage bases.

But don’t forget to keep an eye on the bigger picture. The market is currently in a correction, which means all buys are highly risky. It’s a good time for investors to keep their watchlist updated so they can be ready to buy when conditions improve. They can also consider taking a small position if leading stocks break out in outperforming sectors.

Follow Nancy Gondo on Twitter at @IBD_NGondo

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