Our Focus Record Shares: Lengthy Mannequin Portfolio outperformed the S&P 500 by 35% in 2021. This report seems at a Focus Record Lengthy inventory that outperformed in 2021 and is positioned to outperform once more in 2022. Lately we highlighted three underperformers from 2021 that stay undervalued, which you’ll be able to learn right here.
AutoZone inc. (NYSE:AZO) outperformed in 2021 and nonetheless presents high quality danger/reward. We additionally characteristic two different Focus Record shares that outperformed in 2021, Normal Motors (GM) and HCA Healthcare (HCA) partly 1 and a couple of.
Focus Record Shares Outperformed in 2021
The Focus Record Shares: Lengthy Mannequin Portfolio accommodates the “better of the perfect” of our Lengthy Concepts, and leverages superior elementary knowledge, which offers a brand new supply of alpha.
The Focus Record Shares: Lengthy Mannequin Portfolio returned,, on common, 58% in 2021 in comparison with 23% for the S&P 500, per Determine 1.
Determine 1: Focus Record Shares: Lengthy Mannequin Portfolio Efficiency from Interval Ending 4Q20 to 4Q21
Sources: New Constructs, LLC
As a result of our Focus Record Shares: Lengthy Mannequin Portfolio represents the perfect of the perfect picks, not all Lengthy Concepts make the Mannequin Portfolio. We printed 66 Lengthy Concepts in 2021 however added simply six of them to the Focus Record Shares: Lengthy Mannequin Portfolio in the course of the yr. At the moment, the Focus Record Shares: Lengthy Mannequin Portfolio has 39 shares.
Determine 2 reveals a extra detailed breakdown of the Mannequin Portfolio’s efficiency, which encompasses all of the shares that have been within the Mannequin Portfolio at any time in 2021.
Determine 2: Efficiency of Shares within the Focus Record Shares: Lengthy Mannequin Portfolio in 2021
Sources: New Constructs, LLCPerformance contains the efficiency of shares presently within the Focus Record Shares: Lengthy Mannequin Portfolio, in addition to these eliminated in the course of the yr, which is why the variety of shares in Determine 2 (45) is increased than the variety of shares presently within the Mannequin Portfolio (39).
Outperforming Focus Record Inventory: AutoZone (AZO): Up 77% vs. S&P 500 Up 27% in 2021
We added AutoZone to the Focus Record Shares: Lengthy Mannequin Portfolio in November 2019, and the inventory outperformed the S&P 500 by 50% in 2021. Regardless of giant features in 2021, we see extra upside within the inventory as the corporate is positioned to increase its decades-long revenue development even additional.
Primary Cause for Outperformance: Retail and Industrial Demand for Used Automobiles: In a yr stricken by provide points for brand new automobiles, demand (and costs) for used automobiles, which require extra upkeep, soared. AutoZone is positioned to profit from such development in each retail and industrial markets. AutoZone has efficiently leveraged its retail retailer footprint to drive gross sales development in its industrial enterprise, and, as of fiscal 1Q22, the corporate had expanded its home wholesale program to 86% of its retail markets.
Per Determine 3, AutoZone’s robust home income development has led to market share features. In annually since fiscal 2018, the corporate has grown its home retailer gross sales quicker than the U.S. automotive elements market.
Determine 3: Change in YoY Gross sales: AutoZone Vs. Whole U.S. Market
Sources: New Constructs, LLC, firm filings & FRED
Why AutoZone’s Shares Can Drive Increased: Provide Community Is More and more Worthwhile: AutoZone depends on its giant retailer community and customer support to develop its retail and industrial enterprise. The agency’s bigger shops function each stores and success facilities that allow smaller shops to supply a bigger stock. This success community creates a widening moat for the enterprise which is tough to copy particularly in mild of restricted warehouse provide.
Moreover, long-term tailwinds are favorable for the auto restore market. The common age of automobiles on U.S. roads has steadily climbed from 9.6 years in 2002 to 12.1 in 2021. Older automobiles imply elevated demand for auto elements as automobile restore prices have a tendency to extend as automobiles grow old.
The agency’s sturdy enterprise mannequin has additionally enabled it to enhance its profitability. AutoZone’s ROIC over the previous 5 years has improved from 22% in fiscal 2017 to 34% TTM.
It is also noteworthy that AutoZone stories the reality about its earnings. The agency’s GAAP Earnings of $2.3 billion over the TTM are equal to its Core Earnings. Corporations that report the reality about their earnings usually tend to outperform the market.
Priced for Everlasting Revenue Decline: AutoZone’s price-to-economic ebook worth (PEBV) ratio is 0.8. This ratio implies that the market expects AutoZone’s earnings to completely decline by 20%.
Under, we use our reverse discounted money circulation mannequin to research the expectations for future development in money flows baked into AutoZone’s present share value.
On this state of affairs, if we assume AutoZone’s:
- NOPAT margin falls to fifteen% (five-year common vs. 17% TTM) from fiscal 2022 – 2031 and
- income falls by 1% (vs. consensus expectations for a CAGR of 5% from fiscal 2022 – 2024) compounded yearly from fiscal 2022 – 2031, then
AutoZone’s NOPAT falls 4% compounded yearly over the subsequent decade, and the inventory is value $2,000/share right now – equal to the present value. See the mathematics behind this reverse DCF state of affairs. For reference, AutoZone has grown NOPAT by 11% compounded yearly over the previous 20 years.
Shares Might Attain $3,300 or Increased: If we assume AutoZone’s:
- NOPAT margin falls to 16% (three-year common),
- income grows at a 5% (equal to consensus expectations) CAGR from fiscal 2022 – 2024, and
- income grows by 3% (beneath its 10-year CAGR of 6%) annually thereafter by fiscal 2031, then
the inventory is value $3,300/share right now – 65% above the present value. See the mathematics behind this reverse DCF state of affairs. On this state of affairs, AutoZone grows NOPAT 3% compounded yearly over the subsequent decade.
Over the previous decade, AutoZone grew NOPAT by 9% compounded yearly. Ought to AutoZone develop earnings nearer to historic ranges, the upside is even higher.
Determine 4: AutoZone’s Historic and Implied NOPAT: DCF Valuation Eventualities
Sources: New Constructs, LLC and firm filings
This text initially printed on January 12, 2022.
Disclosure: David Coach, Kyle Guske II, and Matt Shuler obtain no compensation to jot down about any particular inventory, sector, fashion, or theme.
 Efficiency represents the value efficiency of every inventory in the course of the time by which it was on the Focus Record Shares: Lengthy Mannequin Portfolio in 2021. For shares faraway from the Focus Record in 2021, efficiency is measured from the start of 2021 by the date the ticker was faraway from the Focus Record. For shares added to the Focus Record in 2021, efficiency is measured from the date the ticker was added to the Focus Record by December 31, 2021.
 Efficiency contains the 1745% improve in GME inventory value throughout its time on the main target record in 2021.