Why Trucking Stocks Are Poised for Growth

Includes: CVTI, FDX, UPS
by: Wyatt Investment Research

In the five years following the end of the 2001 recession a certain index has soared 240 percent.

Today, this index indicates that some huge gains in a certain sector of stocks are likely. The gains in small caps could be especially big as they typically outperform large cap stocks.

Before I tell you exactly what this secret index is however, I'd like to show you why I believe this industry is well poised for growth, and why stocks in this sector performed so well over the past 10 years.

The industry I'm talking about is trucking, and while it may not seem that exciting on the surface, it is well worth considering the reasons why the trucking industry, and trucking stocks, is poised for huge gains.

Trucking is a key barometer of the U.S. economy. As an economy grows more goods are produced. Those goods need to get from A to B somehow, and the three viable options are rail, air, and road.

Air is expensive, especially for heavy goods. Rail is great, and cheap, but doesn't cover smaller networks. Like air, rail transport relies heavily on trucking to get from major distribution hubs to eventual final destinations.

In the supply chain industry, the use of various modes of transport is referred to as 'intermodal freight transport'. No surprise, intermodal requires close integration of the various transportation methods to ensure there is not a lot of downtime.

Trucking is the most nimble of the available options, and is critical to making the rest of the supply chain efficient. We're not in a rapidly growing economy, so it makes sense to invest in efficiency solutions since they have the potential to keep costs low - and thus they face rising demand.

According to the American Trucking Association (ATA), more than two-thirds of the tonnage moved by all domestic freight transportation goes by truck. That's a healthy share of the market to be sure.

Consider that right now, United Parcel Service (NYSE: UPS) and FedEx (NYSE: FDX) trucks are increasingly moving goods around the country as the holiday shopping season picks up. Business activity is also picking up, and this is the long-term catalyst for trucking stocks.

So what is this index? It is the Dow Jones U.S. Trucking Index (DJUSTK), and it is up 25 percent in the 17 months since this recession ended in June 2009.

If it follows the pattern following the 2001 recession, trucking stocks have a nice run ahead of them over the next three-plus years.

One of top performers in the Dow Jones Trucking Index this year has been Covenant Transportation Group (Nasdaq: CVTI). Admittedly it is a different type of company, with a faith based mission, but I don't think investors need to take a leap of faith to buy shares.

There are five analysts covering the stock, and four rate it a buy with one rating it a hold. The consensus price target on shares is $12, a 30 percent premium to yesterday's closing price.

The investment community is just starting to pick up on Covenant, and analysts expect earnings to more than double to $0.66 per share in 2011. The stock has outperformed the Dow Jones Trucking Index so far this year, rising 85 percent versus the index's climb of 17 percent.

The Chattanooga, Tennessee based Covenant was hit hard by the economic downturn, but appears to have worked through a painful cost-cutting and fleet upgrade. Its top customers include UPS and Wal-Mart Stores (NYSE: WMT), which rely on Covenant whenever it's cost-effective. As shipping needs increase, Covenant will pick up more business to keep its 3,100 tractors and 8,000 trailers busy. After all, many companies are still reluctant to over expand their own fleets so reliance on outside companies like Covenant provides a cost effective solution.

Covenant has put up two straight profitable quarters -- the first time that's happened since 2005. At just below $10 the stock is trading at levels last seen nearly four years ago. With a forward P/E of 13 the stock appears undervalued.

On the downside, Covenant's management did warn that late in the third quarter they didn't see an expected pre-holiday pickup in freight. Investors will want to monitor the stock through the holiday season to see if this improves. But despite management's comments, the stock has rallied since earnings were reported on October 25th so investors seem to think the stock is still a good buy.

I like that Covenant is trading at a bargain price of around $9, is outperforming many of its peers, and is in a strengthening sector. As always, do your own stock research before buying shares, and use my research as a jumping off point.