Battered transport stocks could attract on price

[October 31, 2015]  By Tanya Agrawal
 
 (Reuters) - Though the stock market has broadly recovered from its August swoon, the same can't be said of transport stocks. Continuing weakness in railroad and trucking companies have pushed the Dow Jones Transport Average index away from the S&P 500, a divergence that often is seen as a broad sell sign.

Not this time around, according to analysts. They say the transports, down 11 percent in 2015 compared with the S&P 500's 1.5 percent gain, might be oversold on sector-specific issues rather than from a marketwide problem.

"There is no 'sell' signal as far as I'm concerned," said Katie Stockton, chief technical strategist at BTIG in New York. "The divergence is certainly something to make a note of, in terms of your positioning in the transportation sector, but I don't see it as a message in regard to the broader market."

Analysts point to specific transports, such as United Parcel Service Inc, FedEx Corp, and hard-hit railroads, down 25.1 percent this year, as places to bargain hunt.

The broad transport index, made up of 20 stocks that track the biggest U.S. railroads, trucking and airline companies, is selling at a trailing price-earnings ratio of 16.7, compared with 20.42 for the S&P and down from the 19 level where it started the year.
 

"For investors who have a longer time horizon, that is more than a couple of months, we think the railroad stocks present compelling opportunities," said Keith Schoonmaker, director of industrial research at Morningstar in Chicago.

"There aren't going to be competitors encroaching upon their returns and they have a cost advantage over trucking companies," Schoonmaker said.

He singled out Union Pacific Corp for its diversified revenue portfolio and strong management team and said the stock has a fair value of $110. Union Pacific traded at $89.30 on Friday.

UPS and FedEx, down roughly 7 percent and 10 percent this year, respectively, as they head into the holiday shopping season, their most profitable quarter, could be bargains, said Art Hogan, chief market strategist at Wunderlich Securities in New York.

A handful of transport companies reporting results next week, such as FreightCar America Inc, XPO Logistics Inc and Atlas Air Worldwide Holdings Inc, could post falling revenues and flat to negative earnings.

TRUCKER WEAKNESS "VERY MUCH INTACT"

The Dow Theory, a decades-old method of market timing, holds that a broad index reaching a new high, such as the S&P did in May, should be viewed skeptically unless it is confirmed by the transport index - not the case this year.

That divergence is expected to persist. Though the transport index is often seen as a powerful reading on the broader economy, it is down this year as a function of specific problems.

Also, the transport industry is less indicative of broad economic weakness than it might have been in earlier decades, when manufacturing and shipping were a bigger part of the U.S. economy, said BTIG's Stockton.

Commodities, a key part of the rail business, remain beaten down.

While airlines have added capacity likely to reward them in the future, they are facing a short-term price war. Trucking firms, meanwhile, might be the weakest going forward.

Goldman Sachs slashed its 2015-17 North America truck production forecast by 14 percent on Thursday, citing further deterioration in truck freight volumes and continued weak trucker pricing.

"The downtrends there are very much intact," said Stockton. "I think that would be a pocket of weakness for the transportation sector that for now you'd want to avoid."

(Reporting by Tanya Agrawal in Bengaluru; Editing by Linda Stern and Jeffrey Benkoe)

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