AutoZone, O’Reilly Automotive among top picks at MKM as consumer spending shift
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As recession risks rise and consumer spending habits shift, MKM partners highlighted the need for a less-discretionary focus. Among these names, Autozone (NYSE:AZO), Advance Auto Parts (NYSE:AAP), and OâReilly Automotive (NASDAQ:ORLY) were touted as top picks.

Equity analyst David Bellinger explained in an initiation note that the outsized pricing power of auto parts retailers should protect their bottom line amid inflationary pressures. Additionally, he indicated that consumers spending is merely ârebalancing across recently outperforming categoriesâ and ânormalizingâ rather than pulling back indiscriminately. 

âWe do not necessarily see the beginnings of a spending death spiral given where consumer balance sheets have gone, at least not yet,â Bellinger clarified. âInvestors are now requiring a higher bar into 2H22 in terms of quality, with a sharpened focus on profitable growth and steady cash flows as the Fed's tightening cycle takes shape.â

In terms of Fed policy, Bellinger told clients the current cycle makes more rate-sensitive home improvement stocks less attractive. While Home Depot (HD), Loweâs (LOW), and Floor & Decor (FND) were not considered low-quality by any means, their exposure to adverse macro factors left Bellinger âNeutralâ rated on each of the newly-initiated names. 

âWe recommend clients rotate into the more defensive, highly cash-generative auto parts group with [OâReilly Automotive] (ORLY) our top pick, followed by [AutoZone] (AZO), and [Advance Auto Parts] (AAP) as we see more secular factors outweighing higher fuel prices,â Bellinger concluded. âWe remain sidelined on home improvement names [Home Depot] (HD), [Loweâs] (LOW), and Floor & Decor (FND) as the impacts of higher rates trickle into fundamentals.â
Read more on Wells Fargoâs similar picks for playing defense.