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Transports Buoyed by Multiple Tailwinds: 4 Solid Picks

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The buoyancy in the U.S. economy is highlighted by the fact that consumer confidence – a key determinant of the economy’s health – touched an 18-year high in August 2018.

People’s confidence in the prevailing boom improved to 172.2 in August, the highest level since 2000. With unemployment near a two-decade low, increase in consumer confidence should propel economic growth going forward. The upbeat data underscores the economy's strong fundamentals and consumers’ enthusiasm to spend more.

Improving Domestic Economy Bodes Well for Transports

Given this bullish sentiment and the increasing strength of the domestic economy, it is natural that the widely diversified transportation sector, which includes airline operators, railroads, truckers and shippers to name a few, is witnessing good times. Strong U.S. macro-economic fundamentals as highlighted by the above data, and a substantial surge in manufactured and retail goods are anticipated to fuel the transportation sector’s growth.

With consumer confidence remaining strong, more and more Americans are going for vacations. Further, cheap ticket prices have been an added incentive for consumers, who are benefiting from a much-improved job market and rising disposable income.

Tax Cuts: Major Positive for Transports

The new tax law (Tax Cuts and Jobs Act), which came into force late last year, is a boon for transports and promotes shareholder-friendly activities like dividend payments. The significant reduction in corporate tax rate, under the new law, has boosted cash flow as well as earnings of transportation stocks.

In fact, sectoral heavyweights like Norfolk Southern Corporation (NSC - Free Report) and Delta Air Lines, Inc. (DAL - Free Report) have hiked dividends this year. A further increase in shareholder-friendly activities by transports is likely in the wake of massive savings prompted by the new tax law. Due to the significant reduction in their tax bills, more cash is expected to remain in the hands of these companies to fund their capital expenditures, acquisitions and share repurchases among others.

Upbeat Freight Scenario: Another Positive

Robust freight activity in the United States is an added positive for sector participants. A thriving and improving economy is favorable for the entire sector, as it implies that more goods are being transported across the United States.

Economic growth and demand for freight are positively correlated. Healthy growth in manufacturing, construction, mining and automobile production will increase demand for freight. In fact, the Cass Freight Shipments Index surged 10.6% in July 2018 to its highest settlement since 2007. 

Other Tailwinds

Last month, the United States and Mexico reached a deal to change parts of the North American Free Trade Agreement or NAFTA. The U.S.- Mexico deal buoyed railroads easing the risks of big tariffs on Mexico that could disrupt supply chains and rail shipments throughout North America. Particularly, stocks like Kansas City Southern (KSU - Free Report) , which have significant Mexican exposure got a big lift from the news of the deal.  Now, all eyes are on whether Canada would be part of the revamped trade deal, and negotiations between Canada and the United States are ongoing for the purpose.

Airlines, which form an integral part of the transportation sector, are benefiting from robust demand for air travel. Despite high fuel costs, air fares are quite affordable, thus contributing to the surge in demand. Driven by increased demand, the likes of United Continental Holdings, Inc. and JetBlue Airways Corporation recently issued improved projections for third-quarter unit revenues. Additionally, the rapid e-commerce growth is a huge positive for companies like FedEx Corporation (FDX - Free Report) .

The Zacks Transportation sector carries a rank of 6 (among 16 Zacks sectors). The favorable rank places it in the top 38% of the Zacks sectors, further highlighting the attractiveness of the sector. Given this bullish backdrop, it seems to be a good idea for investors to add stocks from the transportation sector to their portfolio for higher returns.

How to Identify Outperformers

However, the task of selecting the right stock is by no means an easy one, given the high degree of diversity in the transportation space. The process is akin to searching for a needle in a haystack unless one is aware of an appropriate method to make the right choice.

This is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in handy. In addition to a favorable Zacks Rank (#1 or 2) the stocks have market capitalization of over $1 billion.

SkyWest, Inc. (SKYW - Free Report) operates a regional airline in the United States. This Zacks Rank #1 (Strong Buy) stock has gained 69.2% in a year’s time. The Zacks Consensus Estimate for its current-year earnings has improved 6% in the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

 

 

Norfolk Southern, based in Norfolk, VA, is primarily engaged in the rail transportation of raw material, intermediate products and finished goods. This Zacks Rank #2 stock has gained 40.9% in a year’s time. The Zacks Consensus Estimate for the current-year earnings per share has been revised 6.3% upward over the last 60 days.

 

 

Landstar System, Inc. (LSTR - Free Report) This Zacks Rank #2 company is an asset-light provider of integrated transportation management solutions worldwide. The stock has rallied 31.5% in a year’s time. The Zacks Consensus Estimate for the current-year earnings per share has been revised 5% upward over the last 60 days.

 

 

C.H. Robinson Worldwide, Inc. (CHRW - Free Report) , based in Minnesota is a third-party logistics player. This Zacks Rank #2 stock has gained 32.7% in a year’s time. The Zacks Consensus Estimate for the current-year earnings per share has been revised 2.3% upward over the last 60 days.

 

 

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