From a quick glance at AutoNation’s (NYSE: AN) recent price action, you’d probably have no idea that the company has been killing it in the earnings department. With the automotive retailer scheduled to report next week, I think it could be setting up for one of the best plays of the entire earnings season. 

#-ad_banner-#In October, AutoNation delivered its 16th consecutive quarter of double-digit, year-over-year earnings growth. The company reported record profits of $0.90 for the third quarter, up 20% from a year ago and beating Wall Street’s estimates. 

Analysts expect new vehicle sales to reach nearly 17 million in 2015 for the first time since 2005, as consumers’ confidence in the economy grows and they enjoy the benefits of the nearly 40% decline in gasoline prices in the past year.

Despite this positive backdrop and the stock’s relatively inexpensive valuation — trading at 17.5 times earnings compared with an industry average of 22 — shares remain below their highs ahead of the company’s next earnings report, which is scheduled for Feb. 3. 

Based on my research, there is a strong chance of another earnings beat and a subsequent rally to new all-time highs. That’s why I’m getting positioned now with a trade that can leverage the move into nearly 50% profits in just a few weeks.

AutoNation is the largest dealership group in the United States, and it derives more than 55% of its revenue from new vehicle sales. It delivered 320,804 new vehicles in 2014, up 8% from the previous year, with increases in each of its three segments — premium luxury brands, domestic and import. 

The company owns and operates over 270 new vehicle dealerships that sell 33 brands across 15 states. It also sells auto parts, provides repair and maintenance services, and offers automotive finance and insurance products.

Given its reach and diversification, AutoNation is a barometer for the health of the auto sector. But being the best and largest tradable proxy for an industry can also be a burden. Doubts about the health of the space can stifle shares, especially if vocalized by a popular voice. 

Last week, Goldman Sachs (NYSE: GS) lowered its view on the dealer space to “cautious” from “neutral.” And the investment firm downgraded AN to “neutral” from “buy,” saying it expects flat auto sales in 2015 and regulation that could impact markups on retail auto loans. Its analysts maintained their $64 price target, which is 7% above recent prices.

While shares are up about 3% in the past week, I think the downgrade stifled a breakout to new highs ahead of earnings. What’s more, I think Goldman is just plain wrong.

First off, Goldman’s flat sales assessment flies in the face of calls from numerous industry experts.

The National Automobile Dealers Association forecast 16.94 million new cars and light trucks will be sold in 2015, up from an estimated 16.4 million in 2014, on pent-up demand and lower fuel prices. TrueCar, J.D. Power, LMC Automotive and AutoNation all call for 17 million in sales, which is just shy of the 17.3 million record annual sales set in 2000.

Looking at analyst sentiment toward AN, I see caution as opposed to bearishness, with the majority of analysts rating shares a “hold.” This tells me they are waiting to hear confidence and upbeat sales projections from the company before sticking their necks out with a “buy” rating. 

With AutoNation’s record profits in Q3, sales of new vehicles at its dealerships jumping 12% last month, and gasoline nearing $2 a gallon, I don’t see why we should expect anything but a strong report that exceeds the current conservative expectations. 

Concerns over the future of auto sales largely stem from the anticipation of rising interest rates. Higher rates would impact car buyers and AutoNation itself, as the company carries a fair amount of variable debt.

Some, myself included, believe that the recent decision by the European Central Bank (ECB) to purchase 60 billion euros’ worth of bonds per month will cause the Federal Reserve to delay interest rate hikes. Weakness in the euro zone and a soaring U.S. dollar could hinder economic growth here, which would be exacerbated by rising rates. I believe we will see the central bank continue its dovish stance in the near term, which is a good thing for borrowers and for the health of the auto sector.

While I have my doubts about the long-term growth of U.S. auto sales, I am confident in making a short-term trade focused on the low bar set for AutoNation heading into its earnings announcement. I expect the company to exceed expectations and offer positive guidance, causing a run to new highs in shares.

This seems especially likely when you consider that the last time AN traded near current levels was in July, when oil was nearly double its current price. And analysts expect crude to remain below $60 a barrel for most, if not all, of 2015.

At the July highs, AN was trading with a P/E multiple closer to 19, while it now stands at 17.5. That’s not a huge difference, but back then we didn’t have $1.4 trillion dollars flowing from the hands of oil producers into the pockets of consumers in the form of cheap fuel. That alone is a huge bullish catalyst for AN. 

The current consensus estimate is for AutoNation to report fourth-quarter earnings of $0.91 per share. My earnings model, which examines analyst trends, option volatility and volume, is showing the likelihood of a beat of $0.01 to $0.03. I also believe that guidance will be upbeat given the points I’ve outlined above. 

As a professional options trader, I look at the historical volatility of a stock during periods of “normal” volatility and high volatility, such as around earnings announcements. 

With the past four reports, AN has moved an average of more than 9% from low to high in the two days preceding and two days following its earnings release. Currently, options traders are expecting a move of about 7% between now and February expiration, which is three weeks away.

This puts my price target at about $63 per share over the next two weeks. But with a call option strategy, we can buy ourselves a little more time and potentially leverage this move into nearly 50% profits.

Note: While I am an options guy, there is a stock indicator used by one of my colleagues that pegged stocks right before they soared double digits in a matter of weeks. In fact, it delivered gains of 83% in just 28 days and as much as 266% in 12 months. And that was without the leverage of options. He’s offering access to his system to a few hundred people. To learn more about this indicator and see the latest stocks signaling “buy,” click here.

AN Call Option Trade

Today, I am interested in buying the AN March 55 Calls for a limit price of $5.40.

Risk graph courtesy of OptionsHouse.

This call option has a delta of 79, which means it will move roughly $0.79 for every dollar that AN moves, but it costs less than one-tenth of the price of the stock.

The trade breaks even at $60.40 ($55 strike price plus $5.40 options premium), which is 1% above current prices.

If AN hits my upside target of $63, our call options will be worth at least $8. Once you enter the trade, place a good ’til cancelled (GTC) order to sell your calls at that price.

Recommended Trade Setup:

— Buy AN March 55 Calls at $5.40 or less
— Set stop-loss at $2 
— Set price target at $8 for a potential 48% gain in seven weeks