As the iShares Dow Jones Transportation Average ETF (IYT) has recently reached a 52-week high, it seems like an opportune time for the longs to take profits. Many look toward this sector as a proxy for the overall health and stability of the economy, as it is considered to be a very cyclically sensitive sector of the economy. This ETF is up nearly 8% over the past month. While the ETF and the sector have experienced success recently, there are definitely headwinds within the subsectors of transportation, which I will delve into later in this article. The ETF has an expense ratio of 0.46% as of the end of 2012. The P/E multiple for the ETF's holdings is a rich 17.3x TTM earnings. This sector will be very closely watched in 2013.
Recently, U.S. railroad companies have been pressured by the sharp decline in volumes relating to the U.S. coal industry, which has been hit hard lately. On December 15, 2012, I published an article titled "2 Cheap Railroad Stocks To Buy For 2013" in which I recommended two railroad names, CSX (CSX) and Norfolk Southern (NSC), both of which were trading at cheap valuations with decent dividend yields. The P/E ratios for these two names have ticked up recently due to price appreciation; however, their P/E multiples are still relatively cheap. Almost in step with the overall transportation sector and the U.S. stock market, many U.S. rail stocks have rallied over the past few weeks. Coal volumes will be a key factor to watch in this industry, as the rails scramble to make up for the lost capacity. This lost capacity has the potential to negatively affect the companies' earnings, and investors will soon see the magnitude of this effect when the large U.S. rails report FY 2012 earnings over the next few weeks.
After a busy holiday season for the major air courier companies, the focus returns to keeping costs down while trying to build volumes. The two largest players in this space, United Parcel Service (UPS) and FedEx (FDX) have traded almost on par with the above-mentioned transportation ETF over the past month, trading up by 7.35% and 7.44%, respectively. However, a major concern for this industry is the ongoing impacts of higher fuel costs. This is a conundrum for the industry, as higher fuel prices often indicate a strong economy, which in turn can increase shipping volumes, conversely this increase in fuel prices can significantly impact the profitability of these companies. The recent rally provides a good exit point for investors currently in these names.
Over the course of their history, the airlines have been plagued by a vast range of issues from fluctuating fuel costs to operational troubles with aircraft and changes in consumer spending on airfare in conjunction with overall macroeconomic conditions. Airlines are often inconsistent with revenue and earnings trends, given the many factors of their business that are out of their control. That said, three of the largest U.S. airlines - Delta Air Lines (DAL), Southwest (LUV), and United Continental (UAL) - have made rather significant moves to the upside over the past three months, with gains of 35.76%, 29.24%, and 22.01%, respectively. The upward move in these stocks has stayed intact, somewhat due to relative recent stabilizing of fuel costs. Again, this creates an attractive point to take profits, as there are potential upside risks to fuel costs over the medium-to-long term that could negatively impact the airlines.
In tune with a recent rally in the U.S. stock market, the transportation sector has performed very well. Headwinds to the economy, such as the unemployment situation remain and downside risks to the transportation sector are present. One of the largest risks to the sector is the upside potential for oil prices and ultimately fuel prices. With the transport ETF at a 52-week high and P/E ratios becoming stretched, it makes sense for investors to reevaluate their holdings and potentially take profits at this point.