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Transports on Firm Footing Post Q4: 4 Enticing Picks

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After having struggled for most of 2018 mainly due to high oil prices, transportation stocks fared well in the final quarter of the year. Now, the million-dollar question is, what led to the turn of fortunes? The most apparent reason is the reversal in the direction of oil prices. After moving northward till early October, oil prices, in a stunning reversal, displayed a downtrend for the remainder of Q4. Two reasons were responsible for the sharp decline in the price of the commodity — rising supply from major producers and fear that an economic slowdown will dampen the outlook for demand.

The southward movement suited transports well as costs associated with oil are considered major inputs for any transportation company. A rise in oil price leads to a sharp increase in operating expenses of the sector participants, which in turn implies that the health of these stocks is inversely related to fuel cost.  The sharp drop in oil prices (approximately 40% in the October-December period) fueled bottom-line growth in Q4.

Other Bullish Factors

Apart from the decline in oil prices, transports have benefited from other factors as well.  Reduced tax rates, courtesy of the current tax law, have bolstered the earnings picture of transports in Q4. Robust e-commerce growth has also aided results of package delivery companies like United Parcel Service (UPS - Free Report) . Similarly, robust traffic during the Thanksgiving holiday period boosted Q4 results of airlines.

Meanwhile, railroads have been well served by robust freight demand and volume growth. Moreover, most railroads registered improvements in operating ratio (operating expenses as a percentage of revenues).

Due to the aforementioned tailwinds, key sector players like Southwest Airlines (LUV - Free Report) , Union Pacific Corporation (UNP - Free Report) and Norfolk Southern Corporation (NSC - Free Report) outperformed in Q4.

String of Dividend Increases Signal Financial Strength

Adding to the already bullish scenario, transports have been on a dividend-hiking spree of late. Over the past few days, sector heavyweights like Union Pacific, J.B. Hunt Transport Services (JBHT - Free Report) and CSX Corporation have rewarded their shareholders through dividend increases. The financial prosperity of transportation stocks has contributed to their shareholder-friendly attitude.

In fact, the current tax law, which came into force in December 2017, is a boon to transports as far as investor-oriented activities like dividend payments are concerned. The significant reduction in corporate tax rate under the current law has boosted cash flow as well as earnings of transportation stocks. Owing to the significant cuts in tax bills, more cash remains in the hands of these companies to fund capital expenditures, buybacks and dividends among others.

Norfolk Southern’s bullish guidance for 2019 and the long term with respect to key metrics is another positive development in the space. Additionally, the fact that the Transportation sector is the top-ranked one among the 16 Zacks sectors attests to the positivity surrounding the space.

Our Choices

In view of the aforementioned tailwinds surrounding transports, it makes good sense to add them to your portfolio. Therefore, we have highlighted four stocks that may prove to be good buys. All these stocks carry a favorable Zacks Rank (#1 or 2) and have seen favorable earnings estimate revisions for the current year. You can see the complete list of today’s Zacks #1 Rank stocks (Strong Buy) here.

We also take into account Growth Score, which condenses all the essential metrics from the company’s financial statements to get a true sense of the quality and sustainability of its growth. The stocks have a Growth Score of A or B.

A chart showing the share price movement of all the four stocks over the last 30 days is given below.

Union Pacific Corporation (UNP - Free Report) is based in Omaha, NE. The company provides rail transportation services across 23 states in the United States. This Zacks Rank #2 stock has seen the Zacks Consensus Estimate for 2019 earnings being revised upward to the tune of 1.8% over the past 60 days. It has a Growth Score of B.

SkyWest (SKYW - Free Report) , based in St. George, UT, operates a regional airline in the United States. This Zacks Rank #1 stock has seen the Zacks Consensus Estimate for 2019 earnings being revised upward to the tune of 5.3% over the past 60 days. It has a Growth Score of B.

ZTO Express (Cayman) (ZTO - Free Report) is based in Shanghai. It is a leading player in the field of express delivery in China. The company along with its network partners offers domestic and international express delivery services. This Zacks Rank #1 stock has seen the Zacks Consensus Estimate for 2019 earnings being revised upward to the tune of 3.3% over the past 60 days. It has a Growth Score of B.

Southwest Airlines is based in Based in Dallas, TX. This low-cost carrier provides scheduled air transportation in the United States. This Zacks Rank #2 stock has seen the Zacks Consensus Estimate for 2019 earnings being revised upward to the tune of 8.4% over the past 60 days. It has a Growth Score of A.

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