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The Trouble in Transports
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Industry Rank Analysis 3-30-11
Usually I try to highlight different industries in this space and not talk about the same industries over and over again. However, there is a large and economically important set of industries that continue to be very weak on the Zacks Rank -- the Transports.
According to the venerable Dow theory, a new high in the Dow Industrials needs to be confirmed by a new high in the Dow Transports for the uptrend to be sustainable. There is a good economic logic to that. If the economy is getting healthier, then it is producing more stuff, and that stuff has to be moved. While we are not at all-time new highs on the Dow 30, we are knocking on the door of 13,000 and setting new post Great Recession Highs.
The transports have been notable laggards over the last year. This is a worrisome development, and unfortunately, the Zacks Rank is pointing to still further weakness in at least three major parts of the transports.
I reviewed these industries back on February 1. They looked ugly then, and they have not gotten any prettier since. Since the Zacks Rank is most heavily influenced by recent estimate changes, especially over the last four weeks, it means that the cuts are continuing for the transports.
Background on Zacks Industry Classifications
The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one- or two-firm industry to the top (or bottom) of the charts. It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list.
It is even more interesting when you have three large industries, all from the same area, that are clustered together near the top or the bottom. The definition of size that matters here is not the total sales or market capitalization but the number of companies in the “industry.” The three transport industries that are looking exceptionally weak are all much larger than average, the Truckers with 22 firms, the Airlines with 26 firms and the Shipping industry with 50 firms.
Weakness Across the Transports
The law of large numbers make it very unusual for such large industries to appear near either the top or the bottom of the list. Now we also see some weakness in two smaller (by number of firms) transport industries as well: the Transportation Services industry with ten firms, and the Railroads with 8 firms.
The worst of the bunch were the Truckers, coming in 247th place, an improvement of two spots from last week with an average score of 3.59 (remember that high is bad when it comes to the Zacks rank). Right on the heels of the Truckers are the Airlines, in 241st place, a deterioration of one spot as the average rank rose to 3.46 from 3.42.
The Shipping companies -- a huge industry with 50 firms -- are in 228th place, an eleven-spot improvement, even though the average score was unchanged at 3.30. As for the smaller industries, the Services firms are in 224th place with and unchanged average rank of 3.30, while the rails are in 188th spot with an unchanged average rank of 3.13.
For the Truckers and Airlines, higher fuel prices seem to be at least part of the problem, but that should not be a huge factor for the shippers or the rails. Yes, they use a lot of fuel, but on a ton-mile-moved-per-gallon basis, shipping is by far the most fuel efficient method of transport, although it obviously has problems in inland transportation. For inland transportation, rail is by far the most fuel efficient.
Since I last wrote about the groups, there has been little change in the average ranks (and spots on the list) of the Truckers, Airlines and Shipping firms (awful then, awful now). There has been a noticeable deterioration among the Rails, which were in fairly good shape then, in 45th place with an average score of 2.63.
For the most part, these are volatile stocks that are best treated as trades rather than as long term investments. It is better to “rent these stocks” than to own these stocks. With such low Zacks ranks, right now you just want to avoid them altogether -- or if you are adventuresome, short them. If you need a transportation stock in your portfolio, your best bet would be to ride the Rails. Then again, do you really need a transportation stock in your portfolio?
The first table of transport stocks hold the awful Zacks #5 Rank (Strong Sell). The second table shows the Zacks #4 Ranked (Sell) firms. Most of the stocks are small caps, and even micro caps. Those firms are probably very difficult to short, and probably do not have listed options, so the best thing you can do is simply stay away. If you happen to own them, get out while you can. There are a few, though, that are solidly in the mid-cap range which should be shortable, or for which you should be able to buy puts.
Valuations on these stocks are high based on this year’s earnings, and a very large number of them, especially on the #4 list have “N/As” for P/E. That indicates that the company is expected to lose money this year.
Looking out to 2012, the valuations become more reasonable, but not exactly cheap. However, the estimates are falling, and an estimate in motion tends to stay in motion. That means that the actual earnings in 2012 are likely to be lower than are currently being forecast, and the “real P/E” is correspondingly cheaper. Buying low P/E stocks where the estimates are falling is a good way to get stuck in a value trap.
Aside from warning you off about some potential dogs for your portfolio, the weakness in these firms indicates that perhaps the U.S. (and world, as many of these stocks are ADRs) economy is not as strong as we thought (hoped?) it was.
At the end of the day, a very big part of the economy is still about tangible goods, and those goods have to be moved if the economy is going to move. The very weak and persistent earnings estimate weakness in the entire transportation sector should be at least a yellow flag for the rest of the market.
Number 5-Ranked Firms
Usually I try to highlight different industries in this space and not talk about the same industries over and over again. However, there is a large and economically important set of industries that continue to be very weak on the Zacks Rank -- the Transports.
According to the venerable Dow theory, a new high in the Dow Industrials needs to be confirmed by a new high in the Dow Transports for the uptrend to be sustainable. There is a good economic logic to that. If the economy is getting healthier, then it is producing more stuff, and that stuff has to be moved. While we are not at all-time new highs on the Dow 30, we are knocking on the door of 13,000 and setting new post Great Recession Highs.
The transports have been notable laggards over the last year. This is a worrisome development, and unfortunately, the Zacks Rank is pointing to still further weakness in at least three major parts of the transports.
I reviewed these industries back on February 1. They looked ugly then, and they have not gotten any prettier since. Since the Zacks Rank is most heavily influenced by recent estimate changes, especially over the last four weeks, it means that the cuts are continuing for the transports.
Background on Zacks Industry Classifications
The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one- or two-firm industry to the top (or bottom) of the charts. It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list.
It is even more interesting when you have three large industries, all from the same area, that are clustered together near the top or the bottom. The definition of size that matters here is not the total sales or market capitalization but the number of companies in the “industry.” The three transport industries that are looking exceptionally weak are all much larger than average, the Truckers with 22 firms, the Airlines with 26 firms and the Shipping industry with 50 firms.
Weakness Across the Transports
The law of large numbers make it very unusual for such large industries to appear near either the top or the bottom of the list. Now we also see some weakness in two smaller (by number of firms) transport industries as well: the Transportation Services industry with ten firms, and the Railroads with 8 firms.
The worst of the bunch were the Truckers, coming in 247th place, an improvement of two spots from last week with an average score of 3.59 (remember that high is bad when it comes to the Zacks rank). Right on the heels of the Truckers are the Airlines, in 241st place, a deterioration of one spot as the average rank rose to 3.46 from 3.42.
The Shipping companies -- a huge industry with 50 firms -- are in 228th place, an eleven-spot improvement, even though the average score was unchanged at 3.30. As for the smaller industries, the Services firms are in 224th place with and unchanged average rank of 3.30, while the rails are in 188th spot with an unchanged average rank of 3.13.
For the Truckers and Airlines, higher fuel prices seem to be at least part of the problem, but that should not be a huge factor for the shippers or the rails. Yes, they use a lot of fuel, but on a ton-mile-moved-per-gallon basis, shipping is by far the most fuel efficient method of transport, although it obviously has problems in inland transportation. For inland transportation, rail is by far the most fuel efficient.
Since I last wrote about the groups, there has been little change in the average ranks (and spots on the list) of the Truckers, Airlines and Shipping firms (awful then, awful now). There has been a noticeable deterioration among the Rails, which were in fairly good shape then, in 45th place with an average score of 2.63.
For the most part, these are volatile stocks that are best treated as trades rather than as long term investments. It is better to “rent these stocks” than to own these stocks. With such low Zacks ranks, right now you just want to avoid them altogether -- or if you are adventuresome, short them. If you need a transportation stock in your portfolio, your best bet would be to ride the Rails. Then again, do you really need a transportation stock in your portfolio?
The first table of transport stocks hold the awful Zacks #5 Rank (Strong Sell). The second table shows the Zacks #4 Ranked (Sell) firms. Most of the stocks are small caps, and even micro caps. Those firms are probably very difficult to short, and probably do not have listed options, so the best thing you can do is simply stay away. If you happen to own them, get out while you can. There are a few, though, that are solidly in the mid-cap range which should be shortable, or for which you should be able to buy puts.
Valuations on these stocks are high based on this year’s earnings, and a very large number of them, especially on the #4 list have “N/As” for P/E. That indicates that the company is expected to lose money this year.
Looking out to 2012, the valuations become more reasonable, but not exactly cheap. However, the estimates are falling, and an estimate in motion tends to stay in motion. That means that the actual earnings in 2012 are likely to be lower than are currently being forecast, and the “real P/E” is correspondingly cheaper. Buying low P/E stocks where the estimates are falling is a good way to get stuck in a value trap.
Aside from warning you off about some potential dogs for your portfolio, the weakness in these firms indicates that perhaps the U.S. (and world, as many of these stocks are ADRs) economy is not as strong as we thought (hoped?) it was.
At the end of the day, a very big part of the economy is still about tangible goods, and those goods have to be moved if the economy is going to move. The very weak and persistent earnings estimate weakness in the entire transportation sector should be at least a yellow flag for the rest of the market.
Number 5-Ranked Firms
| Company | Ticker | Market Cap ($ mil) | P/E Using Curr FY Est | P/E Using Next FY Est | % Change Curr FY Est - 4 wk | % Change Next FY Est - 4 wk | Current Price |
| Southwest Air | LUV | $9,479 | 16.08 | 13.01 | -7.07% | -8.45% | $12.68 |
| Lan Chile-Adr | LFL | $8,781 | 18.14 | 16.19 | -3.52% | -6.80% | $25.92 |
| Tidewater Inc | TDW | $3,141 | 26.16 | 17.04 | 0.08% | -0.22% | $61.06 |
| Gol Linhas-Adr | GOL | $1,809 | 15.38 | 13.08 | -10.41% | -9.50% | $13.57 |
| Golar Lng Ltd | GLNG | $1,689 | 24.42 | 18.85 | -13.98% | -24.43% | $24.79 |
| Us Airways Grp | LCC | $1,460 | 4.97 | 3.96 | -14.25% | -5.90% | $9.02 |
| Diana Shipping | DSX | $993 | 8.89 | 11.28 | -0.37% | -0.64% | $12.12 |
| Allegiant Travl | ALGT | $803 | 14.48 | 11.04 | -9.51% | -8.34% | $42.22 |
| Aegean Marine | ANW | $363 | 23.67 | 8.01 | -24.52% | -11.34% | $7.77 |
| Saia Inc | SAIA | $257 | 20.47 | 11.88 | 0.00% | 0.00% | $16.17 |
| Scorpio Tankers | STNG | $251 | 55.64 | 23.18 | -34.52% | -1.49% | $10.20 |
| Vitran Corp Inc | VTNC | $231 | 20.9 | 11.66 | 0.00% | 0.00% | $14.19 |
| Ultrapetrol Ltd | ULTR | $151 | N/A | 7.86 | -262.50% | -9.86% | $5.03 |
| Pam Transport | PTSI | $116 | 620 | 31 | 0.00% | 0.00% | $12.40 |
| Horizon Lines-A | HRZ | $99 | N/A | 11.14 | -114.44% | N/A | $3.23 |
| Seanergy Maritm | SHIP | $69 | 14 | 25.2 | -47.06% | -16.67% | $0.63 |
Number 4-Ranked Firms
| Company | Ticker | Market Cap ($ mil) | P/E Using Curr FY Est | P/E Using Next FY Est | % Change Curr FY Est - 4 wk | % Change Next FY Est - 4 wk | Current Price |
| Union Pac Corp | UNP | $47,917 | 14.98 | 12.79 | -0.27% | -0.08% | $97.59 |
| Delta Air Lines | DAL | $8,181 | 5.91 | 4.72 | -17.21% | -11.51% | $9.80 |
| Ryanair Hldgs | RYAAY | $8,088 | 15.85 | 12.09 | 0.00% | -0.44% | $27.15 |
| Kansas City Sou | KSU | $5,568 | 20.06 | 16.36 | 0.10% | 0.71% | $54.23 |
| Air France-Adr | AFLYY | $4,930 | N/A | 9.92 | 0.00% | 0.00% | $16.42 |
| Amr Corp | AMR | $2,167 | N/A | N/A | -272.05% | -162.88% | $6.50 |
| Con-Way Inc | CNW | $2,117 | 29.37 | 17.24 | 0.37% | 0.26% | $38.44 |
| Dryships Inc | DRYS | $1,634 | 4.34 | 4.38 | -0.68% | 0.00% | $4.90 |
| Teekay Offshore | TOO | $1,632 | 18.63 | 19.31 | -2.84% | -1.65% | $30.00 |
| Knight Transn | KNX | $1,605 | 21.41 | 17.71 | -0.27% | -0.08% | $19.15 |
| Hub Group Inc-A | HUBG | $1,297 | 22.62 | 18.27 | 0.75% | 0.00% | $35.23 |
| Airtran Hldgs | AAI | $1,019 | N/A | 19.38 | -100.00% | -15.42% | $7.44 |
| Grupo Aerop-Ads | OMAB | $625 | 20.39 | 15.96 | -6.80% | -3.16% | $14.68 |
| Marten Trans | MRTN | $478 | 18.08 | 14.36 | -0.41% | 0.00% | $21.76 |
| Teekay Tankers | TNK | $473 | 19.51 | 18.55 | -18.91% | -25.35% | $9.83 |
| Genco Shpg&Trdg | GNK | $404 | 7.53 | 12.74 | -21.11% | -26.53% | $11.23 |
| Excel Maritime | EXM | $360 | N/A | N/A | -147.76% | -130.92% | $4.43 |
| Hawaiian Hldgs | HA | $304 | 11.24 | 8.7 | -1.82% | -3.81% | $6.05 |
| Univl Truckload | UACL | $264 | 19.06 | 15.12 | 0.76% | -0.22% | $16.93 |
| Patriot Transpt | PATR | $248 | 32.21 | 29.7 | -0.40% | 0.00% | $26.73 |
| Navios Maritime | NNA | $200 | 103.25 | 13.77 | 0.00% | 0.00% | $4.13 |
| Genl Maritime | GMR | $190 | N/A | 21.47 | -53.46% | -62.34% | $2.12 |
| Paragon Shpgn-A | PRGN | $177 | 31.37 | N/A | -67.80% | -130.39% | $2.98 |
| Pacer Intl Inc | PACR | $168 | 17.85 | 11.89 | 5.19% | 0.00% | $4.82 |
| Star Bulk Carrs | SBLK | $152 | N/A | N/A | 1.22% | 33.33% | $2.44 |
| Baltic Trad Ltd | BALT | $151 | 18.6 | 12.61 | -13.36% | -9.69% | $8.93 |
| Covenant Trans | CVTI | $136 | 18.96 | 11.17 | -6.11% | 0.00% | $9.33 |
| Usa Truck Inc | USAK | $136 | 48 | 15.28 | 0.00% | 0.00% | $12.96 |
| Grupo Tmm Sab | TMM | $49 | 3.24 | N/A | -22.92% | N/A | $2.40 |
| Omega Navigat-A | ONAV | $17 | 17.33 | 26 | 0.00% | 0.00% | $1.04 |
In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.
The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.
Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.
The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.
Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php
Read the full analyst report on UNP
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