Here’s why I bought this FTSE 100 stock for returns and growth!

Jabran Khan explains why he added this FTSE 100 incumbent to his portfolio for returns and growth.

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Some time ago, I made the decision to add FTSE 100 incumbent Auto Trader (LSE:AUTO) shares to my holdings. Here’s why.

Online marketplace for vehicles

Auto Trader is the UK’s leading online vehicle marketplace. Through its website and app, it charges private and commercial sellers to list their vehicles for sale. It started off as a weekly magazine but has evolved as technology adoption has increased.

As I write, Auto Trader shares are trading for 529p. At this time last year, the stock was trading for 575p, which is an 8% drop over a 12-month period. The shares have dropped 20% in the past month from 669p to current levels. I believe this is linked to current economic volatility and fears of an impending recession.

How I decided to buy Auto Trader shares

Starting with the risks linked to Auto Trader shares, I note that a rise in competition in recent years could be a big threat to its market dominance. This is in line with the rise of technology, as well as e-commerce in recent years. This competition could have an impact on the company’s performance and returns.

Next, Auto Trader’s links to the automotive sector are its only source of income. That particular sector is at the mercy of macroeconomic headwinds such as soaring inflation and rising costs. Due to a cost-of-living crisis, consumers may not be in a position to buy new, or sell their current vehicles. This could hinder the uptake of Auto Trader’s offering and impact performance.

So to the bull case of Auto Trader shares. First off, I’m buoyed by its market position. It is the go-to platform in the UK for buying and selling cars. I admit I have used it many times to source my next vehicle, as well as selling a few too. This market dominance should allow it to continue to perform well in the long term.

Moving on to returns, I expect the Auto Trader share price to move upwards, along with the rest of the FTSE 100 index in the longer term. Current volatility will not last forever, in my opinion. This should provide me with some capital returns too. Furthermore, the shares would boost my passive income stream through dividends. At present, the shares dividend yield stands at just 1.5%. I expect this to increase over time too. I am aware that dividends are never guaranteed, however.

Finally, Auto Trader has a good track record of performance. I do understand that past performance is not a guarantee of the future. However, looking back, I can see it has increased revenue in three out of the four years previously. More importantly for me, full-year 2022 revenue surpassed pre-pandemic levels, which is a major positive.

Conclusion

To summarise, I am aware of current macroeconomic issues and understand why the Auto Trader share price is meandering up and down. However, I invest for the long-term, therefore I am not worried or considering selling my shares.

I am buoyed by Auto Trader’s market position, passive income opportunity, as well as recent performance. In fact, if the shares fall further, I may strengthen my position and buy more shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jabran Khan has positions in Auto Trader. 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.

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