|
|
Transportation Stocks Driving The Rally
Posted: May 29, 2008 12:43 PM by James Brumley
Care to guess which sector has clawed its way to the top of the heap? Despite pockets of strength, basic materials and energy are starting to run out of air at their high altitudes. Technology has been coming on strong too. However, in terms of real gains over the last three months, transportation stocks are back on top.
Momentum can only get you so far, though. Fundamentals will ultimately determine a stock's ability to hold its value. So, the question is, can these stocks stay in the lead? Let's take a look.
Groundwork
Just to set the tone here, the Dow Jones Transportation Average is up 16.7% for the last three months. The next best sector is energy, which gained 12.8% for the same time frame. Technology, telecom, and basic materials gained 12.7%, 12.5%, and 12.3%, respectively. The S&P 500 is up only 4.5% for the same period.
What's going on that would prompt a transportation-stock rally?
The knee-jerk answer is (and traditionally has been), as energy prices go down, demand for transportation stocks goes up. However, let's call a spade a spade - we've actually seen the opposite over the last couple of months... and years, for that matter.
No, I think there are two more likely possibilities. The first is, savvy investors are starting to see the light at the end of the economy's dark tunnel, and are adding revenue-bearing stocks to their holdings. The second potential reason is, these stocks are actually undervalued.
All Aboard
The railroad industry has been at the heart of this rally, with its average stock gaining 27.8%. Railroad icons Union Pacific (NYSE:UNP), CSX (NYSE:CSX), and Burlington Northern Santa Fe (NYSE:BNI) are all big winners of late.
The problem with those big run ups, however, is being caught between the technicals and fundamentals. Technically, this industry looks overbought to me. Fundamentally, with an average price-to-earnings ratio of 15.4, it seems palatable. (To learn more about the P/E ratio, check out Is The P/E Ratio A Good Market-Timing Indicator?)
The happy medium may be to wait for a pullback in stock prices. That will make them even "cheaper". If the three big names I mentioned above can continue to grow revenue quarter-over-quarter at their average 13.2% clip, I don't see them staying down for long.
Trucking
Trucking stocks took the No.2 spot for the three-month contest, gaining 20.2%. You've got mostly J.B. Hunt (Nasdaq:JBHT) and Landstar (Nasdaq:LSTR) to thank for that.
Though the broad results here were impressive, I also found the trucking industry to be very hit-and-miss, mostly miss. For instance, Con-Way's (NYSE:CNW) revenue for the last twelve months was 19.9% better than the previous twelve, while YRC Worldwide (Nasdaq:YRCW) actually pulled in 4.1% less revenue for the same period.
They're not all built the same. You could find some great values among the truckers. You just have to weed out the dead weight of overvalued names, which are most of them.
Marine Transportation
Marine shipping stocks gave the trucking industry a good race for the last three months, gaining 16.8%. The difference between them and the truckers is that the boat freight companies probably deserved to experience some price appreciation. Even after the rally, the average stock in this group is trading at a trailing price/earnings multiple of 12.1.
Though over-discussed for weeks now, DryShips Inc. (Nasdaq:DRYS) is still a fundamental bargain. Its revenue explosion will certainly cool off eventually, but even when it does, the stock is still stunningly undervalued at about $95 a share. Dryships' forward-looking price-to-earnings multiple of 6.8 and strangely wide operating margin of 66% merit all the attention they're getting. (For find out more on equity analysis, see Analyzing Operating Margins.)
One shipper that caught my attention was a little off the beaten path: Navios Martime Holdings (NYSE:NM). Its chart looks a little like Dryships' but with a less bloating. It's a Greek shipping company with solid fundamentals and a stock trading at a trailing P/E multiple of 4.5.
Final Thoughts
I mentioned above how the "cheap oil leads to demand for transportation" theory doesn't exactly hold true. Though consumers have grumbled about it, they've willingly paid the higher gas expenses passed on to them from transporters. Now I'll take a step further and say that, when and if oil prices do ease up, I don't expect to see shippers cut out all of the expense they've been passing along to consumers. A nickel here and dime there could further boost margins for these companies as the economy finds a firm footing.
In other words, I don't see the recent strength in the sector as being a short-term fluke. I expect to see select transportation stocks continue to make quiet progress for a long time.
By James Brumley
James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.
Rate this Article:
Your Rating:
Overall Rating:
Vote Now!
MORE STOCK ANALYSIS
 Loading...
THE BEST OF INVESTOPEDIA
Loading...
|
CURRENT HIGH YIELD SAVINGS RATES
Rate data provided by
|
