Transports rallying but aren’t sending ‘all clear’ on economy
Shares of airlines, railroads and shipping companies are climbing, a bullish sign
Shares of airlines, railroads and shipping companies are climbing, a bullish sign the U.S. economy is on strong footing and the broader stock market can continue its recent march higher.
Transportation stocks are viewed as a barometer of economic activity because those companies carry the raw materials and goods that power manufacturing. The Dow Jones Transportation Average, which tracks the performance of 20 stocks ranging from American Airlines Group Inc. to Union Pacific Corp. to FedEx Corp., has jumped19% from its Christmas Eve low. That has outpaced the 15% advance by the Dow Jones Industrial Average.
Proponents of the century-old Dow Theory believe that strength among the transports is a positive indicator for the economy and broader market. But, after the fourth quarter’s bruising selloff, some investors say they are still waiting for further evidence of a rebound before jumping back into the stock market.
“Right now, they’re not quite signaling an all clear yet,” said Carlos Dominguez, president and chief investment officer at Miami-based Element Pointe Advisors. “I’d like to see some of these transportation names show leadership before I say that the next phase of this bull market is in place.”
One reason: The transports index is still 11% below its Sept. 14 high.
Stocks of transportation companies from truckers to railroads to shippers were pummeled late last year, along with the broader market, on rising global-growth worries. Now, signs the Federal Reserve will be patient in raising interest rates, along with stronger-thanexpected corporate earnings and thawing global trade tensions, have helped reassure investors a U.S. recession isn’t looming.
Nancy Tengler, chief investment strategist of Tengler Wealth Management, said her firm currently owns shares of FedEx and United Parcel Service Inc., and she believes those stocks will continue to be benefit from strong e-commerce demand. She dismissed fears of rising competition from Amazon.com Inc., which is planning to launch its own delivery service.
“If manufacturers are shipping goods and consumers are ordering goods, that’s always a bullish sign,” she said.
Mr. Dominguez of Element Pointe agrees, saying his firm intends to invest in FedEx, whose shares have climbed 12% this year, cutting its losses over the past 12 months to 23%.
“Amazon will never replace FedEx,” Mr. Dominguez said. “There’s plenty of room for Amazon to build its own competitor, but when we think of who’s well positioned, FedEx is a longterm winner.”
Element Pointe, which has $400 million in assets under advisement, is also looking to scoop up shares of truckload carrier Knight-Swift Transportation Holdings Inc., Mr. Dominguez said. He said he believes the outlook for the combined companies—Knight Transportation Inc. and Swift Transportation Co. merged in 2017—is strong after the tie-up created one of the top carriers in a fragmented market for truckload services. Shares of the company, which aren’t in the Dow transport index, have surged 25% this year but are still off 34% over the past 12 months.
Airlines, meanwhile, have benefited from lower fuel costs and generally have given strong forecasts for the year, despite the partial government shutdown that disrupted travel in December and January. Among the carriers that reported stronger-than-expected results for the fourth quarter were United Continental Holdings Inc., Southwest Airlines Co. and JetBlue Airways Corp.
Priyal Maniar, a senior research analyst at Brandywine Global, said her firm’s Classic Large Cap Value strategy, which manages $6.3 billion in assets, owns shares of Delta Air Lines Inc. and believes they are undervalued. Delta’s management team has been better than rivals at executing new strategies, including quickly introducing basic-economy fares to their fleet, she said. The firm also has a stake in American Airlines Group Inc. and expects it to post strong earnings growth, she said.
Delta shares have edged up 1.4% in 2019, while American has climbed 14%.
“The airline industry is in a great position right now, especially U.S. airlines,” Ms. Maniar said. “Demand is solid and earnings are the strongest they’ve been in the last several years.”