To say that railroad operators and trucking companies play an integral role in the U.S. economy is the understatement of the year. For as long as there have been tracks, railroads have moved goods across this great land, and almost since the advent of the automobile, trucking firms have been an equally important part of American commerce. Simply put, railroad and trucking companies are literally the engines of the U.S. economy.
While it may seem reasonable to surmise that these two subsectors of the transportation universe may move in lockstep with each other because they're both cyclical in nature, the lack of positive correlation might come as a surprise to some investors.
Another logical assumption would be that in era of high fuel prices, railroad operators would be the better bet. After all, railroads are vastly more fuel-efficient than trucks. On top of that, a single inter modal train has the equivalent capacity of 280 trucks, according to Investopedia. So all the way around, railroads are more efficient than truckers.
So it might come as a surprise to some that a pair of truckers has sharply outperformed the rail-heavy iShares Dow Jones Transportation Average ETF (NYSEARCA:IYT) this year. IYT is up 4.5%. Barely respectable compared to the S&P 500 and not anywhere close to the 12.3% gain offered by Old Dominion Freight (NASDAQ:ODFL). Moreover, Old Dominion is put to shame by the almost 23% surge for J.B. Hunt (NASDAQ:JBHT).
Old Dominion has also outperformed, by fair margins, Union Pacific (NYSE:UNP), Norfolk Southern (NYSE:NSC) and CSX (NASDAQ:CSX). J.B. Hunt has outpaced the railroad firms by such an impressive distance that the year-to-date returns offered by CSX, Union Pacific and Kansas City Southern (NYSE:KSU) would have to be combined to exceed what J.B. Hunt has delivered on its own.
Unfortunately, the tide may be turning against the truckers. Diesel, the number one source of fuel for trucking firms, is steadily rising in price. Shares of J.B. Hunt, Old Dominion and some of their rivals are now viewed as overvalued. The combination of a macroeconomic flaw (rising fuel prices) and rich valuations could make trucking stocks a favorite target of short-sellers. Actually, some professional traders could short the truckers and go long the railroad operators as a hedge.
Yes, the trucking firms have provided nice returns this year, but until all trucks are able to run on natural gas, railroad operators will be the superior long-term bet. Along those lines, as a group, railroad firms are better dividend payers than truckers, doubling the allure for patient investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.