I think now could be an excellent time for me to snap up shares in FTSE 100 member Auto Trader (LSE: AUTO). Let me explain why.
I sincerely doubt the company’s next set of numbers (due in November) will be anything other than robust. Thanks to the global shortage of computer chips for new cars, the second-hand vehicle market is doing very well indeed. Actually, that’s something of an understatement. Based on a recent report from the Society of Motor Manufacturers and Traders (SMMT), the used car market has more than doubled over the last three months.
As the self-styled ‘go-to destination for car buyers’, it’s hard to imagine Auto Trader not benefitting from this activity. It lists around 485,000 cars on any day and estimates that more than 75% of all time spent looking at automotive classified sites is done via its platform.
Now, saying that trading has likely been good isn’t the same as saying that the share price will fly. It really depends on what the market is expecting. Based on recent performance, I wonder if it could be underestimating AUTO.
FTSE 100 laggard
Auto Trader’s up 12% in the last 12 months. That’s certainly not a bad result. However, it’s a lot less than other FTSE 100 stocks. For comparison, Royal Mail has delivered a whopping 162% gain. Construction equipment supplier Ashtead is also up 107%.
Sure, this is like comparing apples with oranges. Nevertheless, it does provide an illustration of ‘opportunity cost’ in investing. It shows the sort of gains I could potentially lose out on when picking one stock over another.
In fact, even those adopting a passive approach and buying a FTSE 100 tracker would have done better. The top tier is up 16% since August 2020. Oh, and there would have been a dividend stream too. And, yes, this would have been higher than the yield on offer at Auto Trader.
Notwithstanding all this, I’d still buy this stock for my own portfolio today for a number of reasons.
Auto Trader’s shares trade on 27 times earnings. That’s certainly not cheap, but nor do I think it’s ludicrously expensive. As highlighted above, this is a business with a dominant hold on its industry. It’s been estimated by the company that 90% of consumers know what it does. If true, that’s very hard to replicate.
Moreover, this FTSE 100 constituent scores high for quality. Profit margins and returns on capital are seriously good, thanks to the relatively low cost of keeping a digital-only operation going.
Third, AUTO’s finances are robust. As intended, the company has paid down its debt pile and now boasts a net cash position. That might not bother some investors, but it’s something I like to see. When the bad times come again, I want the stocks I own to be in a position of strength, not weakness.
Of course, this is the stock market and nothing can be guaranteed. A slowing economy could make AUTO’s share price volatile. One also needs to bear in mind that there will come a time when the chip shortage subsides and demand probably softens.
Then again, I don’t think this will be for while. As such, AUTO would definitely be among those shares I’d buy if I were creating a FTSE 100-focused growth portfolio today.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.