Score A 24% Gain From A Stock That's Already Doubled This Year

The saying that a rising tide lifts all boats is doubly true for the economy. 

As the Federal Reserve's loose monetary policy pours fuel on an already combustible economy, the stock market spirals higher and higher. The Dow Jones Industrial Average surged to a high of 15,604 recently before consolidating in a tight channel near the highs. Meanwhile, the S&P 500 and Nasdaq indexes are flirting with new highs on a near-daily basis.

 

As the fireworks continue on Wall Street, Main Street is also reaping the rewards of low interest rates and supportive governmental policy. I have noticed local high-end restaurants packed to the gills with diners not afraid to drop a few hundred dollars for dinner and drinks for two couples. I tried to get reservations at a nearby hotspot and was told they were taking reservations for September and were completely booked during the month of August. There appears to be more discretionary capital sloshing around the economy than I have witnessed since prior to 2008.

This discretionary spending has acted to improve the bottom lines of multiple sectors in the economy. While nearly every sector is benefiting from this era of easy money, the service sector seems to be getting the most bang for the buck. 

In particular, the auto-rental segment of the service sector is posting record results. This makes sense on two fronts. 

First, as businesses improve, they will naturally rent more vehicles for their traveling sales forces and executives. 

Second, increased consumer discretionary income has found its way into the travel industry, hence the increased need for rental vehicles. 

Shares of the two largest publicly traded rental companies, Avis (Nasdaq: CAR) and Hertz (NYSE: HTZ), are up more than 100% this year as a direct result of the Federal Reserve's quantitative easing supercharging an improving economy. The largest rental car company remains the privately held Enterprise Holdings. 

	Hertz's second-quarter results showed that revenue soared 22% to just over $2.7 billion. The company's vehicle fleet also grew 27%.

Hertz and Avis both have made mergers and acquisitions to retain their leadership status. Hertz received federal approval last month for its acquisition of the Dollar/Thrifty brands, and Avis bought out the struggling Zipcar franchise in March. This consolidation of the industry provides economies of scale as well as the ability to better control prices charged by avoiding fare wars.

Zipcar was struggling before its acquisition by Avis, but the idea of off-premises automatic rentals is powerful. Both Avis and Hertz are expanding their car-sharing businesses while avoiding Zipcar's initial mistakes. I can say from personal experience that renting cars is often an unnecessarily difficult process. The off-premises Zipcar model certainly makes things easier for consumers and is likely to improve the bottom line of both companies.

Both Avis and Hertz have had banner years in 2013, and both would make solid investments right now. As you likely guessed, the companies are strongly correlated, as you can see on this chart:

However, if I were forced to choose between the two, my money would be on Hertz. Here's why:

The company just posted solid second-quarter results with earnings of just over $121 million or 27 cents per share, up from 21 cents a year ago. Revenue soared 22% to just over $2.7 billion. In addition, revenue per transaction rose 1.2%, and Hertz's vehicle fleet grew 27%. However, the company conservatively reaffirmed its full-year expectations for profit of between $1.82 and $1.92 a share, disappointing analysts who had expected $1.90. 

Sounds like a solid, growing company, right? Well, the shares dropped sharply on the news from nearly $27 to $25. This dip is why I like Hertz right now. Clearly, the fundamentals do not warrant the sell-off, so the lower price is a great opportunity for investors.

Risks to Consider: The auto-rental business is closely tied to the economy. The business should continue to thrive as long as the economic picture improves.

Action to Take --> I Like Hertz right now as the pullback from the uptrend created a value buy zone on the chart. Buying here in the mid-$25 area with a nine-month target of $31 and stops at $24 makes solid sense as the economy continues to improve. In addition, Hertz's solid results indicate it is on the right track to continued profits. 

P.S. -- The car-rental industry surely already knows about the tiny company that could kill the gasoline engine -- and investors who read our latest report, "The 11 Most Shocking Investment Predictions For 2014," will, too. Our previous predictions have returned up to 310% in a year; to learn more, click here.