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Dow Transport Theory -- Some Ideas Never Fade

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Some ideas never fade. Instead, they take on a global cast of mind. According to Wiki, Dow Theory emerged from 255 Wall Street Journal editorials written by Charles H. Dow (1851-1902), the journalist, founder and first editor of The Wall Street Journal and co-founder of Dow Jones and Company.

In Dow's late-19th century world, the U.S. was a growing industrial power. The U.S. had population centers, but factories were scattered throughout the country. Factories had to ship their goods, usually by rail. Dow's first stock averages were an index of industrial (manufacturing) companies and rail companies.

To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. With China shipping massive amounts of goods into the U.S. today, Dow transport theory found new life and use. Add on the need to ship via rail the oil from fracking operations in the Bakken Shale oil fields of North America. It is back to the future. In other words, rail leads again.

According to Dow’s logic, if manufacturers' profits are rising, it follows they are producing more. If they produce more, they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, an investor should look at companies that ship the output to market -- the railroads.

The 15 companies representing the Transportation-Equipment and Leasing sector in the Zacks Industry Rank entered the spotlight in the last week, gaining +124 positions. This industry now enjoys a rank of #22 out of 265 ranked industries. With 12 positive earnings revisions compared with 15 negative, this industry, as a whole, is turning a corner after a hard U.S. winter.  Averaging each company’s positive recent Earnings Per Share (EPS) surprises comes to +11%. Earning beats this large means the industry warrants a closer look for outperforming shares.

Below are two companies that moved into the prime position of a Zacks Rank #1 (Strong Buy) from a #2 (Buy) rating last week. Concentrate your portfolio with Zacks #1 Rank shares.  Upward ranking movement in our system implies EPS surprises should continue.

When positive EPS rail industry outlooks lead, Charles Dow is proven right once again.  

American Railcar Industries (ARII - Free Report)

ARII was upgraded to a Zacks Rank #1 (Strong Buy) last week from #2 (Buy).

American Railcar Industries, Inc. is a leading North American manufacturer of covered hopper and tank railcars. ARI also repairs and refurbishes railcars, provides fleet management services and designs and manufactures railcar and industrial components used in the production of its railcars as well as railcars and non-railcar industrial products produced by others.

ARII’s last earnings beat was +33%. The past Q1-14 quarter has an expected EPS estimate of $1.13 a share. It reports actuals on April 30th. The 2015 estimate moved ahead by a nickel in the last 30 days.

GATX Corporation (GMT)

GMT is a Zacks Rank #1 (Strong Buy). It moved up from a Zacks Rank #2 (Buy) over the last week. Having just reported, this company reports its next quarterly earnings on July 17, 2014.

Based in Chicago, Illinois, GATX Corporation leases, operates and manages long-lasting, widely used assets in rail, marine and industrial equipment markets. GATX Corp. also invests in joint ventures that complement existing business activities. The company is a leader in leasing transportation assets and controls one of the largest railcar fleets in the world.

GMT’s recent Q1 surprise was +22%. The earnings beat before that was +23%. Over the last 7 days, next year’s consensus annual 2015 earnings estimate moved up from $4.50 a share to $4.82 a share.

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