Strong transport stocks act as green signal for some investors, others anticipate downturn

  (PHOTO: UNSPLASH.COM)

(PHOTO: UNSPLASH.COM)

With transport stocks surging, some market watchers are hopeful that the current expansion period will continue despite downturns in the broader market earlier this year.

This hope is rooted in Dow theory, which asserts that stock market trends confirm each other. According to the theory, a bullish transportation sector is an indicator of overall economic health because thriving manufacturers produce and ship more goods.

The Dow Jones Transportation Index has held strong over the last 10 months, and top performers J.B. Hunt and Union Pacific have been trading well above their 200-day moving averages since August 2017.

J.B. Hunt has rallied 12.5 percent in 2018, with Union Pacific coming in a close second at 10 percent, according to a story by CNBC.

Both power players have experienced an impressive upswing since early May.

Some transport stocks not represented in the DJT have behaved similarly. Chattanooga-based Covenant Transportation Group has been trading above its 200-day moving average for the past 10 months, and it has also experienced a smaller but still significant climb since early May.

Others, such as Heartland Express, have been trading well under their 200-day moving averages since large downturns in February. The company has climbed to meet its dropping 50-day moving averages over the past couple weeks.

Officials at S&P Transportation Select Industry Index top 10 constituent Old Dominion released a bullish statement Tuesday.

Less-than-truckload tons per day increased 15.3 percent between May 2017 and May 2018, according to the statement. ODFL leaders contributed this change to an 11 percent increase in LTL shipments per day and a 3.9 percent increase in LTL weight per shipment.

“Our May and quarter-to-date operating metrics remained strong, reflecting continued strength in the economy and a positive yield environment. The substantial growth in our LTL tons per day reflects ongoing gains in market share, which we believe is driven by our ability to deliver superior service at a fair price,” ODFL President and Chief Executive Officer Greg Gantt said. “Based on the long-term success of our business model, we are confident that continued execution will produce further long-term gains in market share and shareholder value.”

Covenant released a similarly bullish update.

“As we are almost a week into a seasonally strong freight month, management gave 2Q18 EPS guidance of $0.45-$0.53, well above our (prior) estimate of $0.34 and the Street consensus estimate of $0.38 due to the healthy truckload market,” the report read.

The report reiterates that now is a good time to buy stock in the group.

While U.S. airline stocks have suffered this year thanks, in part, to rising crude oil costs, some analysts believe low prices and a busy summer travel season will lure investors back in, according to a recent Reuters story.

Some market watchers are not as optimistic, instead anticipating at a transport stock downturn thanks to a combination of global trade tensions and industry changes.

Truckload stocks were somewhat weak Monday, which analyst Amit Mehrotra of Deutsche Bank attributed to a recent  Federal Motor Carrier Safety Administration clarification regarding personal conveyance.

“It appears the new directive now allows personal conveyance while loaded (vs. unloaded previously), although still within relatively narrow limits, i.e. a driver’s commute to and from normal work location and short personal trips (for lodging, parking, etc.), and cannot include advancing a load or positioning for loads. The topic is notable given its potential to be a counteracting force to the ELD mandate given there are no mileage restrictions (unchanged),” Mehrotra’s comment read. “While we understand investor concerns around this development, we see little-to-no impact to ELD-driven reductions in supply, given the narrow parameters in which personal conveyance can be used, and effective enforcement mechanisms. As such we continue to be positive on KNX and WERN shares, particularly on yesterday’s weakness.”

Fortune 500 company Paccar’s stock plummeted to -3 percent last week after Goldman Sachs downgraded shares to neutral.

Goldman Sachs Wall Street Analyst Jerry Revich said the change was due to concerns about potential “deterioration in the U.S. truck cyclical outlook in the next year,” according to a Seeking Alpha post.

“While U.S. truck market indicators including rates and loads have stabilized at new cycle highs thanks to strong freight demand and a tight trucking labor market, the load-truck ratio - a ‘critical leading indicator’ - has fallen 30% in the past four months,” the post reads.

Paccar’s trading value has started to climb back up since the dramatic drop, sitting around +1.3 percent Tuesday.

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