It is a well-documented fact that the widely-diversified transportation sector, which includes airline companies, railroads, truckers and shippers to name a few, has had a turbulent time in 2017 due to multiple headwinds. Issues ranging from customer dissatisfaction, high fuel costs, driver shortages, technological glitches and service disruptions due to hurricanes have let sector participants down at various times of the year.
Lets have a deeper look into the major headwinds that have hampered this sector.
Probably, the most infamous incident to have plagued the sector in 2017 was the David Dao incident at United Airlines, the wholly owned subsidiary of United Continental UAL, on Apr 9. The passenger dragging episode drew flak from across the globe, resulting in multiple apologies from the company. Apart from United Airlines, customer dissatisfaction issues have also hurt other airline operators like Spirit Airlines SAVE.
The rise in fuel prices also do not bode well for transportation stocks as expenses related to the commodity are one of the largest input costs for any sector participant. In fact, oil prices have increased more than 37% in the last three months, hitting a more than two-year high of around $59 recently.
Additionally, the recent hurricanes disrupted operations of major sector participants. Consequently, airline operators like United Continental had to cancel multiple flights causing significant loss of revenues.
Hurricanes also hurt operations of major railroads like Union Pacific Corp. UNP and Norfolk Southern Corp. NSC by damaging important rail lines. Freight costs skyrocketed following the natural disasters. Railroads have also been negatively impacted this year by weakness in the automotive sector due to sluggish vehicle production in the United States.
In 2017, technological glitches have hurt sector participants as well. Operations at FedEx Corp.’s FDX subsidiary, TNT Express, were crippled by a cyberattack in June. The attack caused large-scale service delays.
Due the above-mentioned headwinds, the Zacks transportation sector is currently placed at the bottom among the 16 Zacks Classified sectors.
S&P 500 Going from Strength to Strength
With the domestic economy on a solid footing, it is of little surprise that U.S. stock markets are hitting all-time highs on a fairly regular basis. The S&P 500 also maintained its upward journey for 13 straight months through November. The benchmark index, in fact, hasn’t seen a drop of at least 3% since Nov 7, 2016, the longest stretch on record. The index had rallied more than 19% so far this year and is on track to record its best year since 2013.
In fact, strong economic growth has been responsible for this upsurge in the S&P 500 Index. Bullish domestic data released recently are indicative of the healthy position of the U.S. economy.
Per the Commerce Department’s second estimate, the U.S. economy expanded at a 3.3% pace in the third quarter. This represents an improvement from the annualized growth rate of 3.1% in the April to June period and the strongest performance since the third quarter of 2014. Meanwhile, President Trump’s proposals to overhaul the tax law and make it business friendly, have added to the already buoyant scenario.
Transports Lag the S&P 500 Index
While the S&P 500 equity index has been on an uptrend, it has been a turbulent 2017 for the transportation stocks as enumerated above. Given this contrasting scenario, it is of little wonder that the sector has lagged the coveted S&P 500 Index.
The recent optimism surrounding the tax bill, which on becoming a law is expected to aid transports significantly, is primarily responsible for the sector giving positive returns to investors this year. Despite this, it has not been a great year for the sector participants due to the headwinds mentioned above.
The Zacks transportation sector rallied 10.9% year to date compared with the broader S&P 500's gain of 20.3%.
5 Sector Outperformers in 2017
Despite the headwinds to have plagued sector participants, there are a few stocks in the sector which have given higher returns than the sector.
However, given the widely diversified transportation sector, it is by no means an easy task for investors to arrive at such outperformers. To aid their search procedure, we have zeroed in on five such stocks.
The stocks, apart from having solid fundamentals, have large market capitalizations. This is because, focusing on such stocks is considered to be safe. Their large market capitalizations provide the requisite cushion to combat economic downturns and stringent credit conditions.
Our first choice is FedEx Corporation. This Zacks Rank #2 (Buy) company offers customers a one-stop source for global shipping, logistics and supply chain solutions. The company has an impressive expected earnings growth rate (next 3 to 5 years) of 12.8%. which is higher than the industry’s 11%.
The company has a market capitalization of $63.95 billion and a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners.
However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. Additionally, the stock has returned 34.9% year to date. Impressive performance during the current holiday season will boost the stock further. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Our next choice is Union Pacific Corporation. This Zacks Rank #3 (Hold) railroad operator is based in Omaha, NE. As the largest railroad in North America, Union Pacific connects the Pacific and Gulf Coast ports with the Midwest and eastern United States gateways.
The stock has seen the Zacks Consensus Estimate for current-quarter and current-year earnings being revised 2% and 0.7% upward, respectively, over the last 60 days. Additionally, the stock has returned 29.9% year to date. The company has a market capitalization of $101.68 billion.
Moreover, railroads including Union Pacific are seeing good times under President Trump due to his pro-coal stance. Trump is aiming to revive the coal industry by relaxing regulations which were hurting its prospects. As fortunes of railroads are tied to coal, any positive development pertaining to the commodity is a boost for railroad operators.
Additionally, railroads invest significantly for capital expenditure as the industry is capital-intensive in nature. For example, Union Pacific has announced a $3.1 billion capital plan this year, which is in line with its efforts to promote safety and enhance productivity.
In the current scenario, capital expenditures cannot be tax-deducted in the year they are incurred. However, companies will be able to deduct their capital expenditures from taxable income immediately as per the provisions of the tax reform bill. Naturally, this aspect hugely favors railroads and if it materializes companies in the space would be huge gainers.
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Our next choice is also a railroad operator — Norfolk Southern Corporation. This Zacks Rank #3 company is based in Norfolk, VA. The stock has seen the Zacks Consensus Estimate for current-quarter and current-year earnings being revised 2% and 1.7% upward, respectively, over the last 60 days. Additionally, the stock has returned 34% year to date. The company has a market capitalization of $40.31 billion.
We are impressed by Norfolk Southern’s focus on rewarding shareholders through share repurchases and dividends. The company's cost-cutting efforts to drive the bottom-line are also encouraging. The company expects earnings per share to grow in double digits (compound annual growth rate) by 2020.
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Airline behemoth Delta Air Lines DAL has also outperformed the transportation sector this year despite the headwinds. This Zacks Rank #3 company, based in Atlanta, GA, is a leading provider of scheduled air transportation for passengers and cargo throughout the United States and around the world.
The company has a decent record with respect to earnings per share, having beaten the Zacks Consensus Estimate in two of the last four quarters. The average beat is 1.6%. Moreover, the stock has an impressive dividend paying history.
The stock has returned 14.3% year to date. Delta has a market capitalization of $39.39 billion. Moreover, the tax reform bill, on becoming a law is expected to aid airline stocks just like railroads.
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Our list of sector outperformers in 2017 is rounded off by American Airlines Group AAL. The company, headquartered in Fort Worth, TX, operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe. This Zacks Rank #3 company has an impressive record with respect to earnings per share, having beaten the Zacks Consensus Estimate in three of the last four quarters. The average beat is 3%.
Additionally, the stock has returned 11.2% year to date, outperforming the sector despite the difficult year. The company has a market capitalization of $24.03 billion.
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