Transportation is one of the more boring industries one can investigate for investment purposes. Year after year, transportation companies do what they have always done: move stuff.
They don't promise to cure diabetes or transform the way we interact with our world the way smartphones have, but our diabetes drugs and smartphones need to be shipped to the stores we buy them in.
We will need companies who perform the mundane task of bringing good X from point A to Point B for what might as well be forever. Everyone loves to talk about railroad stocks as great investments; Warren Buffett has talked about them, in part, because they display the economic moat he looks for in his investments. Building a railroad requires significant up-front costs, and Buffett appreciates the fact that railroads are in many senses a monopoly.
Railroad stocks are great investments. Using DualBeta, a site which measures the up-market and down-market betas and alpha, Norfolk Southern (NYSE:NSC) would have returned an alpha of 0.14 over the last 10 years, and a $1 investment would have grown to $3.2 (vs.$1.2 for the S&P 500), not including dividend reinvestment.
Similarly, Union Pacific (NYSE:UNP) would have returned an alpha of 0.16 over the last 10 years, and a $1 investment would have grown to $4.2, again not including dividend repayment. Long story short, if you did the boring thing and invested in railroads, you were rewarded handsomely.
Why look anywhere else in the transportation industry when getting such robust returns? Well, there is another transportation segment, with slightly higher betas (avg. 1.1 vs 0.95 for railroads), with >90% correlations to railroad stock prices, that has blown railroads out of the water. The trucking industry's two dominant players, Old Dominion Freight Lines (NASDAQ:ODFL) and J.B. Hunt (NASDAQ:JBHT) have proven to grow at even higher rates than the railroads.
ODFL would have returned an alpha of 0.42 over the last 10 years, and a $1 investment would have grown to $18.2 (vs.$1.2 for the S&P 500), not including dividend reinvestment, because it does not pay a dividend. Sorry, dividend investors. While I value management's commitment to a dividend as a proxy for its commitment to producing shareholder value, I am a young investor with time to allow capital appreciation to take place. As I have stated in previous articles, long-term, I target 80% dividend-paying companies and 20% stable growth companies.
Likewise, JBHT would have returned an alpha of 0.27 over the last 10 years, and a $1 investment would have grown to $8.3 (vs.$1.2 for the S&P 500), not including dividend reinvestment. JBHT has a 1.02% dividend yield with a 25% payout ratio and 10% cash flow payout.
In conclusion, ODFL is trading below its 5-year average P/E of 20, so I would recommend looking into this company further because it offers significant upside based on a performance and value basis. In contrast, JBHT sports 25 P/E, above its 5-year average of 23, so it could be slightly overvalued. The railroad stocks generally trade at lower multiples, but the multiples' disparity is supported by the respective growth rates within the industries. Top- and bottom-line growth have outpaced railroads, and appear poised to continue to do so in the near future.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in (ODFL) over the next 72 hours.