AutoCanada Inc. (ACQ.TO)

It is a roll up story. Management team is presumed to be quite good. Stock trades at a high multiple. Acquisition growth is priced into the stock. It most recently stumbled, probably due to a quarterly report that missed on some metric. With no organic growth, if they stumble the stock is hit. She would not buy this type of company. She would prefer an auto parts manufacturer like Magna in this sector.

The issue is that they are a consolidator. The US side of the market is well defined, so in Canada they went from 0 to 50 dealerships in no time. The question is what they can do now. You are looking at dealership growth. There is no more juice in their numbers. The magic formula is falling away. Wait until the shoulder forms and then sell into it.

Really solid management team. Has seen this consolidation of auto dealerships in the US being very successful. Not cheap, but the opportunity ahead of them is substantial. Have executed very well on the business plan.

Took quite a drop, but doesn’t know what the specific reason for it was. It is good news that the large auto manufacturers are friendly with the company. All the metrics are very good for Canadian auto sales. The problem with a consolidation play is that the market gets a little addicted to it, and the minute you are not doing acquisitions they start wondering what is the organic growth. He would probably be interested in buying this pretty soon.

An overcrowded trade. This is a tough business. It’s okay if car sales are strong, but if car sales flatten out, he wouldn’t want to be there. There is no sign of a breakdown yet, but he would be very careful. He would look for a rally back up to half of its decline, around $78, and then don’t let it go down below its low of around $71.

Stock is off about 20%-25% and they recently did an equity offering at about $78 to fund the acquisition of several dealerships. Right now, pro forma, they have about 48 dealerships. The dealership market in Canada remains extremely fragmented. A bunch of the owners of these dealerships want to retire during the next few years, so this company has a great opportunity to consolidate the market. Relatively expensive when you compare it to some of the US peers, but growth is much higher. You have to have a very long-term time horizon if you own it, with the understanding that you may see a little bit of multiple compression. He is contemplating buying this on a pullback.

Trending down and may have something to do with the view that car sales couldn’t get much bigger than they’ve been. Car dealerships are a good thing to own and there are some economies of scale in owning a lot of dealerships. Have had a huge run and there is competition in the field, but there is also big generational change coming. Thinks it has a very good 5 year outlook. If you are buying, pick away at it, such as by thirds.

(A Top Pick Oct 16/13. Up 92.49%.) Continues to like this one. Has pulled back a little because of 1) articles indicating competition coming in from the US, and 2) they did a secondary offering. He still really likes it and there is still a lot of room for it to go. Own roughly 45 dealerships in Canada, and there are probably 250-300 dealerships available. If they went to smaller dealerships, there are 3,300 dealerships available.

Consolidating the car dealership industry. Superbly run. Has been a fantastic performer. Had a pullback because they did a financing, and will probably drift around here for a while, until the market adjusts. Over time there is still a lot of room for this to grow. Not a cheap stock. Thinks it is trading at 40X trailing earnings. You are probably okay to own this. Has a good future.

This looks like a typical pullback after a strong move. You need the little bit of profit taking to pause the momentum. He would bet that momentum indicators would be out of control high.

Bollinger bands indicate that right now there was a lot of contraction at the beginning of the year followed by a big expansion from $43 up to $88. Thinks we are in a period now of contracting prices, less volatility. Feels that if the stock continues to pull back, it will be around $71. If it drops below that, you probably want to exit. Volume is not too high right now. You want to see it going back up into the $80’s before you buy.

Issued $350 million in shares and is going to pay down some debt. Stock is done extremely well, basically because of the economic recovery we are going through here. If he is looking at a market correction, he would think auto stocks are going to get hurt.

Wonders why someone has not replicated it. That would be the only risk in owning it.

(He owns their bonds, not the stock.) Looks expensive, but is one of those that will always look expensive. Basically a growth by acquisition story. Not a business that has large organic growth. You have to watch when they make acquisitions. Recently raised money with a bond issue. They’ll take that money and plow it back into buying more dealerships. As long as they do that, it goes up. However, if they ever miss a quarter, or run out of things to buy, watch out because there is a lot of air under it.

Likes the auto theme. This is a way to get Canadian exposure. They expanded. Have other auto manufacturers now. This is a roll-up story. Going to acquire independent dealerships. Today they announced that they are going to up their targets and renewed their CEO contract. Up 230% in the last year, but look what has happened in the industry. A lot of dealerships are looking to sell out. They put out some very strong guidance.