How Trump Could Drive AutoNation, CarMax Shares Higher

AutoNation, Inc. (AN) and CarMax, Inc (KMX) are among the 10 stocks that could most benefit from corporate tax cuts, per JPMorgan

Feb 10, 2017 at 11:59 AM
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JPMorgan Chase & Co. (NYSE:JPM) just identified the 10 stocks that could benefit the most from President Donald Trump's vow to reduce corporate tax rates. Interestingly, two of them are connected to the auto sector: parts retailer AutoNation, Inc. (NYSE:AN) and vehicle seller CarMax, Inc (NYSE:KMX). Over the past five years, both companies have paid an average tax rate of over 38%, meaning that a tax cut could pad profits. Below, we'll take a closer look at the shares, as well as activity among options traders and short sellers.

AN is up 0.6% today at $47.64, but has pulled back more than 10% this month due to a poorly received earnings report. It appears the shares also got rejected by the 50% retracement of their 2015 highs and 2016 lows. That said, the stock could find a foothold near its current level, which is more or less flush with its year-over-year breakeven mark.

autonation stock chart fibonacci retracement

Options traders have been bearish toward AN shares, based on International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) data. The stock's 10-day put/call volume ratio sits at a top-heavy 2.80, in the top one-third of all readings from the past year. Not to mention, AN sports a Schaeffer's put/call open interest ratio (SOIR) of 1.42, ranking above 86% of readings from the last 12 months.

Echoing this negativity are short sellers. Nearly one-tenth of AutoNation, Inc.'s float is sold short, which would take seven trading days to cover, at the stock's average pace. While the shares' technicals leave something to be desired, a Trump-induced bounce from current levels could spark a capitulation among bears, potentially bolstering gains.

KMX's chart is much better. In the past year, the stock has soared 59% to trade at $67.03, and late last month it hit an annual high of $68.86. In recent weeks, the 40-day moving average has materialized as a layer of support, too.

Given these superior technicals, it's no surprise to see options traders striking a much more bullish posture. KMX's 10-day ISE/CBOE/PHLX call/put volume ratio of 11.37 registers at an annual high, meaning speculators have been scooping up calls over puts at an extreme rate. Echoing this, the stock's SOIR is perched at a 12-month low of 0.32, with calls tripling puts among options expiring in the next three months.

However, short interest is considerable on the outperformer. Specifically, 11% of CarMax, Inc's float is sold short, which would take over two weeks to cover, at the stock's average trading level. From a contrarian perspective, KMX shares are in a prime position to benefit from a short-squeeze situation, especially if a Trump tax cut accelerates their gains.

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