Stock Sonar #11 - 6/14/2023

Advance Auto Parts (NYSE:AAP) mrkt cap $4.08B; Price $68.66; trailing P/E 10

PASS. AAP is an automotive aftermarket parts provider that caters to both professional and DIY customers. The stock caught our attention due to a significant decline of over 50% this year, primarily driven by inventory issues, supply chain challenges, and diseconomies of scale. Unfortunately, their inventory comprises a poor mix and is bloated. Immediate action is required to heavily discount prices, rationalize inventory, and strengthen relationships with vendors to enhance fill rates. Regrettably, the company is currently facing significant operational difficulties and is unlikely to resolve them under the current CEO. On a positive note, there is an ongoing search for a new CEO. It could be the case that this company is trading low enough where one can “hold their nose and buy” but our discipline is to wait for signs the ship is righting itself before considering a position.

Hammond Power (TSX:HPS) mrkt cap $551mm; Price $46.35; trailing P/E 13

PASS. Hammond Power manufactures dry type transformers and has about 25% share in the North America market. They have been around for more than 100 years and their main competitors are independent manufacturers and large players like Eaton and Schneider. Hammond stands to capitalize from the electrification of the USA. This is a megatrend from electric vehicle charging stations to the infrastructure bill to the rise of GPU datacenters. Hammond specializes in custom made transformers and has thousands of SKUs and produces a couple of thousand new ones every year. Although the company is run well and has significant tailwinds, margins are inflated given the supply tightness of transformers in the last year. We will look to buy Hammond given a pullback.

Natural Grocers (NYSE:NGVC) mrkt cap $266mm; Price $11.72; trailing P/E 16

MORE RESEARCH NEEDED. A well-managed specialty grocer based in Colorado with a strong commitment to providing healthful foods. The company upholds rigorous standards across all food categories. They currently operate 166 stores in the western and midwestern regions of the United States. In 2018, they temporarily halted their expansion efforts to prioritize profitability. However, they have recently resumed their expansion plans and aim to add 4-6 new stores annually. There is a promising opportunity in the relatively low penetration of their private label products (only 7% of sales compared to competitors like Sprouts at 20%). Additionally, industry trends regarding organics and health foods are favorable. This is a company we will continue to dig through.