Transports Week In Review - Selective Stock Picking Increasingly Important As Broader Markets Widen Lead Vs. Transports

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Includes: AMZN, CAI, CGI, CNI, CPB, CSX, ECHO, EWC, EWW, FCNTX, FDX, GATX, GBX, GWR, JBHT, KHC, KNX, KSU, LSTR, MRTN, R, RAIL, RLGT, SAVE, SNDR, SPY, TGH, UL, UN, UNP, UPS, USAK, VLRS, XPO, XTN, YRCW
by: James Sands

Summary

Transports are now up 3.3 percent, whereas SPY is up 5.2 percent.

Momentum broadly has continued, but the broader markets are outperforming transports.

During 2016, transports were one of the top-performing indices; this has led to many companies trading at fair value or slight premiums.

Selective stock picking is becoming increasingly important as a result.

Source: Google Images

As we closed the week on February 17th, markets have continued to strengthen their momentum since earlier in January.

Source: Yahoo Finance and personal database

I think I'll continue to track this performance from the Lean Long-Term Growth Portfolio's (LLGP) benchmark comparison. The NASDAQ (IXIC), Fidelity Contrafund (MUTF:FCNTX) and NASDAQ Transportation (^TRAN) were all up close to eight and 10 percent. Many other indices were up close to or above four percent.

During 2016, transports were unstoppable, especially after the lows set in January/February. There were two separate events that also propelled stocks higher: the post-Brexit and President Trump election rallies. Early in 2017, the tables have turned. Transports are not performing terribly by any means, but the broader markets have widened their lead.

As broader markets and some investors look to shift to areas with stronger momentum, investors can still make out with solid gains during the year if they pay close attention to transports, which still have strong upside potential.

YTD 2017

Source: Yahoo Finance

For the sixth 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 1.9 percentage points. The S&P 500 ETF improved by 160 basis points (bps) to 5.2 percent, while the S&P Transportation ETF improved by 40 bps to 3.3 percent for 2017.

Transports continue to see moderate strengthening as 2017 progresses. The primary divergence has mostly been related to the substantial positive results from container lessors and other companies within select freight industries. This has been contrasted by negative performance for smaller plays, usually exposed to higher leverage.

Earnings results continue to pour out on a weekly basis, with more to come. The big news that came out last Friday was The Kraft Heinz Company's (NASDAQ:KHC) bid to acquire Unilever (UL, UN). The initial deal was rejected, but thoughts are that another bid may come in at a higher level. Both Kraft Heinz and Unilever rallied on the news, but many other food stocks declined. Campbell Soup Company's (NYSE:CPB) earnings and outlook did not help.

On the macro front, most news continues to remain positive. There continue to be the usual suspect naysayers on Seeking Alpha. However, it would appear that the recent freight and energy recessions which occurred during 2015 through 2016 were the times to be buying.

Rail Operators

Source: Yahoo Finance

All rail operators displayed solid positive performance for this past week. On a relative basis, Kansas City Southern (NYSE:KSU) displayed the strongest improvement, as performance for the year more than doubled. Some complications have arisen with the CSX Corp. (NYSE:CSX) management and board restructuring, as Hunter Harrison continues to seek the CEO position.

Week six of 2017 witnessed further improvement for Class I total traffic carried; carloads improved further, as did intermodal. CSX and Norfolk Southern continue to lead the pack, followed by Genesee & Wyoming (NYSE:GWR), Canadian National (NYSE:CNI) and Union Pacific (NYSE:UNP). I like Canadian National over Union Pacific, and I still believe Canadian National and Kansas City Southern offer the highest upside potential at current levels.

Railcar Manufacturers and Lessors

Source: Yahoo Finance

Most railcar manufacturers and lessors improved during the week, the exceptions being The Greenbrier Companies (NYSE:GBX) and FreightCar America (NASDAQ:RAIL), which were both flat. Both FreightCar America and GATX Corporation (NYSE:GATX) remain negative for the year.

I continue to view most of the railcar manufacturers and lessor peer group as overvalued. For railcar manufacturers, in particular, it could still take a couple years before things pick up from an order perspective. Concurrently, another down-cycle could soon follow.

Truckload Carriers

Source: Yahoo Finance

Many truckload carriers were down for the week, but some did improve. On the surface, companies like J.B. Hunt Transport (NASDAQ:JBHT), Landstar System (NASDAQ:LSTR), Marten Transport (NASDAQ:MRTN) and Ryder System (NYSE:R) were higher, indicating a focus on top-choice companies. Other smaller players, though, including Celadon Group (NYSE:CGI) and USA Truck (NASDAQ:USAK), were top performers for the week.

Swift Transportation (SWFT) witnessed substantial negative performance, as the company is back to its yearly low of -8 percent. I continue to wait for Schneider National (NYSE:SNDR) to go public. If Swift continues to remain weak, I will strongly consider it against Schneider National to add to the LLGP.

Less-Than-Truckload Carriers

Source: Yahoo Finance

Most less-than-truckload (LTL) carriers were flat to marginally negative this past week. The notable laggard continues to be YRC Worldwide (NASDAQ:YRCW), which is now down -1 percent.

Despite being the best value on paper, YRC Worldwide still has two long-standing challenges: its union labor and pensions and leverage levels. No other peer in the LTL industry has both challenges. For short-term traders, this makes for a good quick-gain opportunity. For long-term investors, the company is best avoided. I do not see any compelling opportunities here.

Air Freight, Package and Delivery

Source: Yahoo Finance

Air freight, package and delivery companies were up for the week, with the only exception being United Parcel Service (NYSE:UPS). Like YRC Worldwide, UPS has struggled since its earnings report, as the results did not get markets excited. Air cargo lessors also witnessed a strong week.

As Amazon (NASDAQ:AMZN) continues to grow its air cargo capacity through lessors, there will likely be opportunistic times to take positions. I am taking a wait-and-see approach for these companies. I continue to believe FedEx Corporation (NYSE:FDX) is compelling to own, especially below the $190 per share level.

Contract Logistics, Forwarding and Brokerage

Source: Yahoo Finance

Contract logistics companies witnessed some of the strongest stock price performance on a relative basis to other freight industry peers. All the large players were strong; Radiant Logistics (NYSEMKT:RLGT) and Echo Global Logistics (NASDAQ:ECHO) have diverted, with Radiant up 28 percent, while Echo remains down around six percent.

I continue to like XPO Logistics (NYSEMKT:XPO) out of this group. The company did get past the $50 per share level during the week, which is where I believe it will stay once earnings are announced.

Container Shipping Lines, Charter Owners and Container Lessors

Source: Yahoo Finance

The container shipping industry companies remains highly volatile. Vessel charterers and owners witnessed strong positive performance, as did container lessors. Both CAI International (NYSE:CAI) and Textainer Group Holdings (NYSE:TGH) reported results and have disclosed a much more positive expectation for the market for 2017.

Despite all the optimism for 2017 in the container shipping industry, there are still structural issues related to capacity. Demand did improve after the Hanjin Shipping bankruptcy, and supply did tighten to a degree. But sustainability of increased demand remains an unknown.

Airlines

Source: Yahoo Finance

Airline stocks were stronger for the most part this past week, with exceptions being Controladora Vuela Compania de Aviacion (NYSE:VLRS) and Spirit Airlines (NASDAQ:SAVE). Warren Buffett did announce taking positions in select airline stocks.

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 per recent announcements that 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 and Intermodal Units Carried

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

Through the sixth week of 2017, total traffic was up 1.8 percent, with carload traffic up 3.6 percent - a 10 bps improvement; and intermodal traffic at -0.2 percent - a 30 bps improvement. Week six performance has displayed sustained improvement, building from the previous weeks.

These numbers continue to be not far off from the total traffic originated results of two percent for the first six weeks of 2017, published by the Association of American Railroads (AAR) data. Investors should remember that total traffic carried includes both originated and received carloads and intermodal units.

Container traffic was at -0.1 percent - a 30 bps improvement. Since the peak shipping season for the Chinese New Year has come to an end, average container spot market rates have declined over the past few weeks. But year-over-year (YOY) performance has remained strong for most trade lanes. The DAT-Weekly dry van spot rate average remained down over three percent at mid-February. Intermodal rates will likely mirror these trends.

Week four witnessed weekly coal carload traffic at 111,000 carloads carried. This reflected a 13.3 percent increase versus last year. Coal is expected to be much stronger than in 2016. Grain performance was down eight percent versus last year.

Motor vehicles and equipment carload traffic performance was up 3.5 percent versus last year. Chemicals were up 1.3 percent, petroleum products were down 10.5 percent and crushed stone, gravel and sand was up 19 percent. Petroleum products remained at marginally lower levels from the previous week.

Trucking Industry

Source: Cass Information Systems, Cass Freight Index

The January 2017 Cass Freight Index Report was released during the week. For all shipments and expenditures, YOY improvement was at 3.2 and 4.3 percent respectively. Month-to-month (MTM) changes were at -6.4 and -.0.3 percent, respectively.

For the trucking industry, total loads and tonnage have displayed improving trends as we start 2017. Dry van loads have underperformed both, however. Average spot market freight rate pricing for dry van loads has now declined for five straight weeks. YOY changes have been down by around three percent.

Expectations are for the market to tighten, especially during the second half of the year. This is anticipated to lead to an uptick in contract renegotiation earlier in the year as beneficial cargo owners (BCOs) look to lock in lower rates and avoid any spot market gyrations.

Air Cargo

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

Revenue tons for air cargo carriers continue to display an improving trend from the lows set during the late first quarter of 2016. Globally, volumes have sustained growth through 2016. Expectations are for this trend to keep its pace into 2017.

As is the case in the container shipping industry, structural issues remain, with capacity still outpacing demand. Carriers continue to be focused on expanding capacity to compete in providing the greatest flexibility for customer needs. This is being impacted by e-commerce growth as just-in-time and faster deliveries to fulfill orders push limits.

Container Shipping Lines

Source: Alphaliner - Top 100 Operated Fleets as Per February 18, 2017

Average spot market container pricing has begun to decline through mid-February. Despite weekly declines, on a YOY basis, average spot market freight rates continue to be up substantially, with some still attaining triple-digit results. Vessel owners and charterers are doing all they can to keep rates up for upcoming contract negotiations. With some of the lowest spot market pricing occurring during June of last year, this trend may continue.

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 were 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

Early numbers are filtering out for U.S. seaports for the month of January's TEU performance. Seaports, including Los Angeles, Long Beach, Charleston, Savannah and Virginia, have already reported their numbers.

The month of January is likely to continue the trend of the last three months during 2016. For the West Coast, Los Angeles and Long Beach witnessed laden import and export TEUs up 13 and 29 percent and seven and 11 percent, respectively.

  • Charleston's laden imports and exports were up 25 and 28 percent;
  • Savannah's laden imports and exports were up 19 and 16.5 percent; and
  • Virginia's laden imports and exports were up 20 and 17.5 percent.

Some experts have attributed this performance to the Hanjin bankruptcy, a later Chinese New Year and restocking of inventories for 2017. The reoccurring theme continues to be the question of sustainability.

North America Cross-Border Trade

Source: Yahoo Finance

The iShares MSCI Mexico Capped ETF (NYSEARCA:EWW) witnessed a down week versus the iShares MSCI Canada ETF (NYSEARCA:EWC). The Mexico index is now up four percent for the year, versus the 6.2 percent results for the Canadian index.

The interesting part of this performance deviation is that some select companies trading on major U.S. stock exchanges, and with exposure to Mexico, still witnessed positive performance for the week, while others did not. Investors should expect both indices and individual companies to continue to be volatile as we move closer to the realities of border tax adjustments or new tariffs and, ultimately, the North America Free Trade Agreement (NAFTA) revisit.

Summary

Broader markets have increased their lead over transports. Transports were one of the top-performing indices during 2016 as the freight recovery ensued. As many companies in freight industries are now trading at or slightly above fair value, investors need to be more selective in adding companies from these industries.

Despite broader shifts, select companies will offer solid returns throughout 2017. The other side of the picture is whether demand will increase above expectations. If this were to occur, more companies could begin to offer further upside.

Disclosure: I am/we are long AMZN, CNI, FDX, JBHT, KSU, UL, 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.