One of the first signs of a recovering economy is a pickup in the movement of goods and materials. With demand increasing, companies need to get products made and delivered, and put the machinery in motion for a blossoming of growth.
This year, the slow, inconsistent global economic recovery has propelled the transportation industry forward in fits and starts - a bumpy road since the recession put a stranglehold on expansion a few years back.
In this on again, off again shipping environment, logistics companies typically shine as their efficiency solutions keep freight operators competitive.
While logistics and transportation services bring to mind some of the bigger movers and shakers, including world-class companies such as UPS (NYSE: UPS) and FedEx (NYSE: FDX), it is a sector where small-cap investors can also find compelling opportunities.
Take for example one stock that has come back to life, Atlas Air Worldwide Holdings (Nasdaq: AAWW). In less than a year the stock, which is in both the Russell 2000 and Russell 3000 indexes, has doubled and is now trading near $50. After a pull-back from around $60 in July it has started to again trend higher.
Atlas' stock is still up more than 50% over the past 5 years, so it has held up remarkably well despite the recession.
Atlas Air picked up steam in September when shares jumped 12% after releasing a particularly bullish earnings outlook. The company's principal subsidiary operates the world's largest fleet of 747 freighter aircraft, which it leases to customers in the U.S. and abroad. With a $1.29 billion market cap, Atlas Air is poking its head out of the small-cap realm, but it remains a stock with growth potential.
My favorite way to play this sector is in the small-cap logistics companies, including relative newcomer Echo Global Logistics (Nasdaq: ECHO). On the surface, Echo appears locked into a tight trading range between $10 and $15 - shares closed yesterday at $12.76. But stock charts only go skin deep, and this company deserves a closer look.
Echo, which was founded in 2005, is still a fresh face on The Street. It just hit the Nasdaq exchange through an October 2009 IPO. The offering was priced at $14 a share and raised nearly $80 million. Despite the rocky economy, Echo went public in the midst of rapid growth - its revenue shot from $95.5 million in 2007 to $259.6 million in 2009.
Four of six analysts covering Echo believe the stock will outperform while the other two call it a "buy." Although it is a newcomer, Echo Global is already a member of the Russell 2000 list.
I like Chicago-based Echo because it doesn't actually move the goods - it provides the web-based technology that companies use to manage their transportation and supply chain needs. Echo takes information from a network of 24,000 transportation providers, finds areas where there's excess capacity, negotiates competitive rates, and helps fulfill its clients' shipping needs.
The company's logistics services handle shipping via planes, trains and trucks - and monitors movement from pickup to delivery. In a world where time, and weight, equal money, first rate logistics technology is mission critical.
Barron's website recently posted a Credit Suisse commentary featuring logistics companies. In the article the analysts suggested they liked Echo because it was a smaller version of C.H. Robinson Worldwide (Nasdaq: CHRW), a company they labeled as "too expensive at current levels." The same, Credit Suisse said, is not true of Echo, which it concluded "offers superior top-line growth and its net-revenue margins are at industry levels."
Echo's earnings per share have beaten analyst estimates by a penny or two the past two quarters since going public, and for the just-ended September period, analyst expect EPS of $0.12. Full-year EPS should grow 72 percent next year, from $0 43 cents a share in 2010 to $0.74 in 2011.
The consensus analyst price target is around $18, implying 42 percent upside for Echo Global above yesterday's close.
A recent article in Smart Business Chicago quotes Echo CEO Douglas Waggoner as saying that the company is relying on the forward thinking of its 1,000-plus employees to move the logistics company forward. Many of those he'll rely on are from Generation Y, rather than from his own Baby Boomer age bracket.
That youthful spirit, Waggoner says, gives Echo Global the agility needed to excel in a challenging market environment - and to succeed once the economy finds itself again on firm footing.
Echo is part of the Russell 2000 index - a small cap compendium of hidden gems just waiting to be unearthed by savvy investors. A Special Report featuring three such gems is available by clicking here and signing up for a risk-free trial subscription to Small Cap Investor PRO. Check it out and you'll find three companies primed to take off in the face of a solidifying global recovery.