Transport stock rally gaining steam

Strong demand from retail sales in third quarter

A rally in Canadian transport stocks is gaining momentum, backed by a pickup in e-commerce as consumers favour online shopping amid a resurgence of coronavirus in parts of the country.

The ongoing pandemic, coupled with strong demand from online retail sales in the third quarter and Amazon.com Inc's two-day Prime Day sale this week, turned investors' attention to shares of companies tied to package deliveries.

The S&P/TSX Industrials Index, comprised mainly of transportation, engineering and construction firms, has seen the biggest rally among sectors on the main benchmark, led by Cargojet Inc., Canadian Pacific Railway Ltd. and TFI International Inc.

“The consumer-driven momentum seen through July and August may be hard to replicate, but current macroeconomic trends signal that the recovery is broadening,” said BMO Capital Markets analyst Fadi Chamoun in a recent report.

With a only a small group of Canadian tech stocks for investors to access, these companies are an unconventional way to play the stayat-home theme.

Some retailers are already showing signs of a surge in e-commerce activity. Aritzia Inc., a clothing chain favoured by Meghan Markle, reported second-quarter profits that beat analysts' projections. The stock posted its biggest weekly gain in six months.

With Canada's earnings season slated to kick off this week, it also helps that analysts are expecting these firms to report blockbuster quarterly results with the online buying trend, along with broad economic improvements in manufacturing, housing and the automotive industry. Both CP Rail and Canadian National Railway are scheduled to report on Tuesday, and TFI International on Thursday. Still, the rally may be tempered as investors assess the results and what companies have to say about their outlook. In the U.S., both JB Hunt Transportation Services Inc. and Marten Transport Ltd. slumped after third-quarter results missed expectations.

For now, investors are turning to companies that have stood out amid the pandemic, such as Cargojet, which has experienced a surge in volumes. Its stock rose for a sixth week — its longest winning streak since May — last week and touched a fresh record.

Beacon Securities analyst Ahmad Shaath said on Wednesday the company should benefit from Amazon's Prime Day and as well as from other retailers' promotions. He now has the highest share price target of $310 among analysts tracked by Bloomberg who cover the stock. Cargojet closed Monday at $229.07