Transports Week In Review - Transports And SPY Both Have A Solid Week

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Includes: AMZN, CAI, CGI, CMRE, CNI, CP, CSX, CVTI, ECHO, EWC, EWW, FCNTX, FDX, FWRD, GBX, GSL, KNX, KSU, MATX, NSC, ODFL, PTSI, R, RLGT, RRTS, SNDR, SPY, TRTN, ULH, UNP, VLRS, WAB, XPO, XTN, YRCW
by: James Sands

Summary

Transports are now up 2.9 percent; whereas the SPY is up 3.6 percent.

Markets have picked up steam as we move further into February.

Mexico index gets stronger; individual stocks exposed to U.S. - Mexico imports have also improved.

Uncertainty is still present, volatility should be anticipated.

Source: Google Images

As we closed the week on February 10th, it has become apparent that markets have strengthened performance from earlier in January.

Source: Yahoo! Finance and personal database

A quick look at my Lean Long-Term Growth Portfolio's (LLGP) benchmark comparison is telling. The NASDAQ (IXIC), Fidelity Contrafund (MUTF:FCNTX) and NASDAQ Transportation (^TRAN) were all up over six percent for the year. Many other indices were up close to or above three percent.

In addition to U.S. stock market performance, Mexico's iShares index was also up six percent for the year. Individual stocks with exposure to either direct operations within Mexico or U.S.-Mexico imports have been hit multiple times this year. However, these same companies have displayed improving strength over the past couple of weeks.

Uncertainties remain for any increases for infrastructure spending, tax reforms, immigration policies, border tariffs and/or tax adjustments, among many other items. Volatility will continue to impact markets leading to swings in performance.

YTD 2017

Source: Yahoo! Finance

For the fifth week of 2017, the spread between the S&P Transportation ETF (NYSEARCA:XTN) and the S&P 500 ETF (NYSEARCA:SPY) remained reversed with the S&P 500 ETF up by 0.7 percentage point. The S&P 500 ETF improved by 100 basis points (bps) to 3.6 percent; while the S&P Transportation ETF improved by 130 bps to 2.9 percent for 2017.

Transports closed out the past couple of days of the week strongly. The recovery for transports was broad based, but some companies within industries continued to witness significant weakness. The most volatile industry remains to be the container shipping industry. Aside from container lessors, there has not been a lot of positive performance early this year.

Bank regulations were at the forefront this week with anticipation for eased regulation leading markets higher. The energy sector gained some momentum as oil prices charged higher. Consumer sentiment dipped a bit in February, but overall macro trends continue support further economic expansion.

Rail Operators

Source: Yahoo! Finance

Most rail operators were flat to marginally lower, with the exceptions being CSX (NYSE:CSX), Norfolk Southern (NYSE:NSC) and Canadian National (NYSE:CNI). Rail operators continue to be a strong performing industry for transports. An announcement is expected soon regarding Hunter Harrison as the new Chief Executive Officer (CEO) of CSX.

Week five of 2017 witnessed further improvement for Class I carloads carried; carloads improved further and as did intermodal. CSX and Norfolk Southern have strong momentum now. At current levels, I still like Canadian Pacific (NYSE:CP) and Kansas City Southern (NYSE:KSU). I also like Canadian National; Union Pacific (NYSE:UNP) remains a little too rich, now that it is approaching the $110 per share level.

Railcar Manufacturers & Lessors

Source: Yahoo! Finance

Railcar manufacturers and lessors were also flat to lower like their rail operator peers. The Greenbrier Companies (NYSE:GBX) has come down from its peak of 18 percent to eight percent. The decline is warranted, but there is still room for more downward pressure. Westinghouse Air Brake Technologies (NYSE:WAB) has been the most consistent performer thus far.

Most Class I rail operators have disclosed reduced capital expenditure budgets for 2017. My read on railcar manufacturers is that it could still take a couple of years before things pick from an order perspective.

Truckload Carriers

Source: Yahoo! Finance

Truckload carriers were highly mixed during this past week. Many of the smaller players witnessed worse performance from the previous week, including Celadon Group (NYSE:CGI), Covenant Transportation (NASDAQ:CVTI), P.A.M. Transportation (NASDAQ:PTSI) and Universal Logistics Holdings (NASDAQ:ULH). Top performers included Ryder System (NYSE:R) and Knight Transportation (NYSE:KNX).

I continue to like Swift Transportation (SWFT) as a top potential investment pick for 2017. However, I am waiting for Schneider National (NYSE:SNDR) to go public as it will be paying a dividend and is financially stronger.

Less-Than-Truckload Carriers

Source: Yahoo! Finance

For less-than-truckload (LTL) carriers, YRC Worldwide (NASDAQ:YRCW) witnessed a strong decline for the week as the company reported lower earnings than estimated. YRC continues to trade in a volatile fashion each earnings report. The company admittingly will not be able to generate as high of margins as some of its union-free peers.

Despite strong performances from Forward Air (NASDAQ:FWRD) and Old Dominion Freight Line (NASDAQ:ODFL), I still view LTL carriers as overvalued. If macro trends improve further, there could still be more room to run. But I would be looking for better entry points.

Air Freight, Package & Delivery

Source: Yahoo! Finance

For air freight, package and delivery companies, FedEx Corporation (NYSE:FDX) was the sole company to witness improvement for the week. I think that this group has some room to see further appreciation this year. I continue to like FedEx the best amongst these peers.

Gross domestic product and retail sales, including e-commerce sales will continue to be economic indicators for the health of air freight and package delivery companies. Amazon.com's (NASDAQ:AMZN) net sales miss has some wondering whether e-commerce is slowing. Growth will continue to outpace traditional retail, but patterns may not replicate the same trends as 2016.

Contract Logistics, Forwarding & Brokerage

Source: Yahoo! Finance

Contract logistics companies were stronger this past week with the only exception being Echo Global Logistics (NASDAQ:ECHO). Radiant Logistics (NYSEMKT:RLGT) beat both earnings and revenue estimates and the stock soared by over 25 percent during the week. All other peers displayed gradual positive momentum along with transport indices.

With the run up for Radiant, I do not see a lot of value for most of these companies, with the exception being XPO Logistics (NYSEMKT:XPO). If the company is able to deliver a solid earnings and revenue beat, the stock should head north of $50 per share.

Container Shipping Lines, Charter Owners & Container Lessors

Source: Yahoo! Finance

Container shipping industry companies displayed a wide variation in performance this past week. Top performers included Triton International (NYSE:TRTN) and Costamare (NYSE:CMRE), both up around four percent for the week. Laggards included CAI International (NYSE:CAI) and Global Ship Lease (NYSE:GSL), both down 12 and nine percent respectively.

The container shipping industry will remain challenged during 2017. Maersk Line does believe that the average spot market rates will not witness the same degree of declines as occurred during 2016. However, some experts believe that a price war could still occur, especially in the Trans-Pacific trade lane.

Matson (NYSE:MATX) has become more volatile of late, generally trading in a range between $34.50 and $36.50 per share. I still believe that investors are best suited accumulating shares closer to the low-$30s where possible.

Airlines

Source: Yahoo! Finance

Airline stocks were stronger for the most part this past week. Controladora Vuela Compania de Aviacion (NYSE:VLRS) continued its improvement during the week. The Mexico operated airline is now down only one percent after being down by as much as 15 percent in late January.

The primary threat to airline operations for 2017 continues to be the possibility of increasing oil prices leading to higher jet fuel costs. Air traffic travel continues to be positive for most airlines as recent announcements have been provided. Timing of fare hikes, unionized labor and protests at airports remain other challenges.

Demand Trends

Key demand-based indicators that are monitored include Class I rail traffic, trucking industry tonnage, shipments, and loads, air cargo tonnage, container shipping line twenty-foot equivalent units, TEUs, North America seaport TEUs, shipping lane port calls, North America cross-border trade, and freight rates for most of these indicators.

U.S. & Canada Class I Rail Traffic - Carloads & Intermodal Units Carried

Source: Class I websites and personal database, carload and intermodal units carried

Through the fifth week of 2017, total traffic was up 1.7 percent with carload traffic up 3.5 percent, a 150 bps improvement; and intermodal traffic at -0.5 percent, a 120 bps improvement. Week five performance has displayed sustained improvement, building from the previous weeks.

These numbers were not far off from the total traffic originated results at 1.9 percent published by Progressive Railroading sourcing the American Association of Railroads (AAR) data. Investors should remember that total traffic carried includes both originated and received carloads and intermodal units.

Container traffic was at -0.4 percent, a 110 bps improvement. Since the peak shipping season for the Chinese New Year has come to an end, average container spot market rates have remained flat to marginally lower. The DAT-Weekly dry van spot rate average was down three percent at the end of January. Intermodal rates will likely mirror any freight rate weakness.

Week four witnessed weekly coal carload traffic at 116,000 carloads carried. This reflected a 21 percent increase versus last year. Coal is expected to be much stronger than in 2016. Grain performance was up 32 percent versus last year.

Motor vehicles and equipment carload traffic performance was up two percent versus last year. Chemicals were up seven percent, petroleum products were down 8.5 percent and crushed stone, gravel and sand was up 24 percent. Petroleum products remained at similar levels from the previous week.

Trucking Industry

Source: Cass Information Systems, Cass Freight Index

Through early February of 2017, there has been some volatility for the trucking industry's public companies. This has been driven largely by quarterly earnings performance and in Roadrunner Transportation's (NYSE:RRTS) case, the need to restate the company's financials.

Average spot market freight rate pricing for dry-van loads has been in an uptrend since the lows set in mid-April 2016. But volatility has also been prevalent for freight rate pricing.

To date, asset-based carriers have been some of the strongest performers when compared to asset light providers. Similarly, larger peers have also tended to outperform their smaller peers for public companies. I expect these trends to continue, especially if capacity begins to tighten.

Air Cargo

Source: U.S. Dept. of Transportation, Bureau of Transportation Statistics, Air Cargo Summary Data

Despite a nearly four percent increase in air cargo during 2016, performance still lagged the greater than five percent increase in freight capacity. The performance in 2016 was a bright spot as the average growth over the previous five years was at approximately two percent.

Projects for global gross domestic product (GDP) growth are positive for most regions including the U.S., Europe and some Asian countries. As energy prices recover, other nations exposed to oil exports may also benefit. Despite these expectations, some experts remain cautious. This is merited as the air cargo industry continues to witness capacity growth greater than air cargo demand.

Container Shipping Lines

Source: Alphaliner - Top 100 Operated Fleets as Per February 11, 2017

As of early February, average spot market container pricing has remained mostly flat to marginally lower over the past few weeks. The primary exception has been the Trans-Atlantic eastbound rate which was up. The worst performing rate index has been the Trans-Pacific Drewry eastbound.

On a year-over-year (YOY) basis, average spot market freight rates continue to be up substantially, some even triple digits. Like the air cargo concerns, capacity growth remains as a threat to any sustained and or pick-up in container shipping demand. Record numbers for vessels sent to scrap yards was witnessed during 2016. Idling of vessels to manage assets has been deployed. Maersk (OTCPK:AMKAF) has even delayed delivery of newbuild vessels by as much as a year. Still concerns remain as to the viability of improved operating performance for 2017.

North America Seaports

Source: North America seaport websites and personal database

U.S. seaports are facing a conflict as the Trump administration continues to push its agendas forward. On the one hand, an increase in infrastructure spending is likely to provide additional funds that will supply seaports with much needed dollars for investments into a wide variety of facilities.

On the other hand, the higher emphasis of protectionism across the international borders touching the U.S. directly or through U.S. seaports from any other nations has caused some concern. Adding further complexity is the leaked project list excluding major California and New York seaports.

Like most of the whirlwind of events occurring daily, the dust is going to have to settle. If there is indeed a big push for infrastructure spending with new funding, seaports will be benefactors. The uncertainty facing seaports, and many other entities, is being caught on the wrong side of the rhetoric.

North America Cross-Border Trade

Source: Yahoo! Finance

Despite some volatility, the iShares MSCI Mexico Capped (NYSEARCA:EWW) remained ahead of the iShares MSCI Canada ETF (NYSEARCA:EWC). The Mexico index is now up six percent for the year versus the 5.5 percent results for the Canadian index.

The performance of the Mexico index and companies exposed to Mexico imports into the U.S. is an indication that investors are leaning towards a less risky proposition for the near term. This is as of today, and things could still change quite quickly, because there are no concrete answers in place. Speculation will continue to drive the market.

Summary

Broader markets have regained momentum and pushed higher. Transports continue to be a little more volatile than broader peers; currently performance has lagged peer results. There will likely be more distinction between winners and losers during 2017 for transport stocks. This will be contrary to 2016's broad-based recovery performance.

Based upon this potential, investors should consider their risk tolerances and investment strategies. With the challenges that lie ahead, I continue to believe that larger transport peers will be better positioned.

Disclosure: I am/we are long AMZN, FDX, KSU, MATX, XPO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.