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Surviving O'Reilly When The Parts Don't Fit

Tickers in this article: DELL AZO ORLY GPC AAP
NEW YORK ( TheStreet) -- If you're a current O'Reilly Automotive (ORLY) investor, Wednesday's guidance update must have felt like a fan belt broke on a lonely stretch of highway on a Sunday night without cellphone service.

TheStreet's Ken Shreve warned O'Reilly investors over a month ago about the company in a Real Money Pro article titled " Time to Wheel Away ." (You need a Real Money Pro subscription to read, but if you don't have one this is why I believe you need one.)

O'Reilly Automotive has lost about 17percent of its market cap from Tuesday's close. The loss in market cap is a result of expectations of earnings in the lower range of $1.13 to $1.17. This marks the end of three quarters in a row of beating estimates.

Unfortunately, expected earnings moving forward captured Wall Street's attention. Analyst revisions down for the next earnings report outnumber higher revisions 3 to 1. Wednesday's move lower broke through strong support at the 200-day moving average of $63.50. Usually, the first break through and below the widely watched 200 moving average fails, and investors can expect a retest.

O'Reilly Automotive's CEO Greg Henlsee blames the weather and a shift of sales from this quarter to the first quarter for softness, but that doesn't explain why June is below expectations.

According to Henlsee: "Our previously announced second-quarter comparable store sales guidance reflected our slow start to the quarter in April due, we believed, to the shift of some business into the first quarter as a result of the early spring weather in many of our markets, and we expected sales trends would stabilize as the quarter progressed. We saw improved comparable store sales results for the month of May; however, comparable store sales in June were below our expectations, and we now expect comparable store sales for the second quarter to finish in the range of 2.0% to 2.5%."

Insiders sold over 632,000 shares, or about 15 percent of their holdings, in the last six months. Some will say there are many reasons why insiders sell (stock options, etc..), but the bottom line is the motivation to sell or buy is nearly the same. You don't sell a stock you think is moving higher in price regardless of the source.

Institutional sales were more aggressive in the number of shares sold in the last six months. Net flight of money from O'Reilly Automotive was 9.6 million shares or almost 10 percent of holdings in the last quarter.

Other companies in the space are gapping down in price in sympathy including Advance Auto Parts (AAP) , AutoZone.(AZO) and Genuine Parts Company (GPC) .

AutoZone opened Wednesday near the key support level of $354, which is the 200-day moving average, and bounced higher. This week Genuine Parts dropped below the 200-day moving average and gapped lower Wednesday. Monday and Tuesday was the wakeup call for Genuine Parts investors. Usually on the second breach of the key moving average is the one that "sticks." Genuine Parts illustrates the point perfectly.