Source: Google Images
As we closed the week on March 17th, markets have continued to show a strong deviation from transports. Aside from the NASDAQ Transportation (^TRAN) index, other core transportation indices have weakened further.
I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance has improved at just below 8 percent, as highlighted in green. As transport indices continue to weaken, the Fidelity Contrafund (MUTF:FCNTX) and NASDAQ (IXIC) remain atop all peers, both up nearly 10 percent. The Dow Jones (DJT) SPDR S&P 500 ETF (NYSEARCA:SPY), Vanguard 500 Index (MUTF:VFINX) and Vanguard Total Stock Market ETF (NYSEARCA:VTI) were all up above or close to 6 percent.
Despite the continued weakness for transports, broader market indices are off to a great start in 2017. In my book, this is to be expected as many individual companies in transport industries have gotten ahead of their valuation levels.
For the tenth week of 2017, the spread between the SPY and the S&P Transportation ETF (NYSEARCA:XTN) increased with the SPY up by 6.3 percentage points. The SPY declined by 30 basis points (bps) to 6 percent, while the S&P Transportation ETF declined by 120 bps to -0.3 percent for 2017.
Since March 1st, transports have declined by 530 bps, while the SPY has held constant. While many transport stocks have witnessed stretched valuations, there continue to be buying opportunities for patient investors.
All rail operators displayed declines during the past week. This was led by Kansas City Southern (NYSE:KSU) and Genesee & Wyoming (NYSE:GWR). Kansas City Southern can't catch a break this year. The company announced yesterday that the Mexican Competition Commission published an abstract of its preliminary report on effective competition in the market for interconnection services, trackage and switching rights used to provide railway freight public services in the rail freight industry in Mexico.
The Commission concluded that effective competition was lacking in the market of trackage rights in rail networks of the major operators, including Kansas City Southern. A final report still needs to be submitted, and evidence and arguments need to be reviewed. This just adds more uncertainty to U.S. - Mexico diplomacy and relationships for trade.
Week ten of 2017 saw improvement for Class I total traffic carried. Based on the risk associated with trade, I am partial to the Canadian rails and Union Pacific. I remain skeptical of East Coast rail operators' ability to grow profit margins to levels of top performing peers. For Kansas City Southern, investors need to have plans A, B and C if they are going to take on the risk over the near term. Genesee & Wyoming still needs to fall a bit more before I would be interested.
Railcar Manufacturers & Lessors
Interestingly, railcar manufacturers and lessors outperformed their rail operator counterparts. This was likely the case from last week's strong selloff. I still remain on the sidelines for all companies in this group.
Investors looking for exposure within this group should be on watch. I do not see any strong value in any of these companies at these prices. I continue to view The Greenbrier Companies (NYSE:GBX) as the best-in-class rail manufacturer to own, at the right price.
Most truckload carriers were lower for the week. The past couple of weeks have witnessed a reversal in performance. Celadon Group (NYSE:CGI) and USA Truck (NASDAQ:USAK) have both declined substantially. Roadrunner Transportation (NYSE:RRTS) has defaulted on its credit agreement and is now in a forbearance agreement with substantial restrictions, over the next year. Collectively, there is some caution for the first couple of quarters of 2017 for the industry.
I remain cautious on investing in smaller players, especially with the events that have occurred with Roadrunner. These smaller players are not going to grow organically and will continue to depend on acquisitions. Highly levered companies remain risky. I did recently add to the J.B. Hunt Transport (NASDAQ:JBHT) position this past week, and I am considering the pending Schneider National (NYSE:SNDR) IPO.
Like truckload peers, most less-than-truckload (LTL) carriers were also down for the week. YRC Worldwide (NASDAQ:YRCW) has served as the bust for the year so far. But any market tightening should propel these stocks higher if it occurs later in the year.
I have exposure to LTL through the ownership of both FedEx Corporation (NYSE:FDX) and XPO Logistics (NYSEMKT:XPO). I also bought and sold YRC last year. As union labor agreements get closer for YRC, I am less inclined to take the risk. Old Dominion Freight Line (NASDAQ:ODFL) remains the best opportunity, but is not at a great price.
Air Freight, Package & Delivery
Air freight, package and delivery companies were positive for the week, with the only exception being Air Transport Services Group (NASDAQ:ATSG). I continue to question Air Transport Services Group's ability to grow faster than Atlas Air Worldwide (NASDAQ:AAWW) over these next few years. A higher valuation for Air Transport Services Group places more risk.
My pick for 2017 remains to be FedEx. I still believe that by year-end, the stock will potentially lead this group by stock price performance. Right now, it is positioned nicely at 4.5 percent for the year, marginally lower than Atlas Air and Deutsche Post DHL Group (OTCPK:DPSGY).
Contract Logistics, Forwarding & Brokerage
Most contract logistics companies were down for the week, with exceptions being Echo Global Logistics (NASDAQ:ECHO) and Radiant Logistics (NYSEMKT:RLGT). Both companies had been down over the past couple of weeks, so some bargain hunting may have been in order. Hub Group (HUB) witnessed the strongest decline for the week.
XPO Logistics continues to be my favorite out of this group. But with Hub Group's recent substantial decline, the stock has popped up on the radar. Hub Group is a prime candidate for further consolidation and/or continued growth for the intermodal market.
Container Shipping Lines, Charter Owners & Container Lessors
The container shipping industry remains highly volatile; most companies witnessed strong growth this past week. The exception was Seaspan Corporation (NYSE:SSW) which lost another percent for the week. Seaspan has used multiple financing techniques that some analysts feel may not provide for as strong cash flow in a slower newbuild environment.
Action in the container shipping industry is ripe for traders. As freight rates ebb and flow with a strong stance for positive performance from last year through June of 2017, opportunities will likely continue. Container lessors have remained as the top performers for the year, led by Textainer Group Holdings (NYSE:TGH). Costamare (NYSE:CMRE) has been the second-best performer.
Airline stocks were all down for this past week. This past week's decline was strong. As mentioned before, I do not provide strong coverage on the airline industry, but Alaska Air Group (NYSE:ALK) and Southwest Airlines (NYSE:LUV) have become more interesting of late based on stock price declines. I may develop technical charts and begin to pay closer attention to fundamentals.
I continue to take a measured approach at the potential for oil prices to increase. Timing of fare hikes, unionized labor and protests at airports remain other challenges.
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
Through the tenth week of 2017, total traffic was up 2.8 percent with carload traffic up 4 percent, a 10 bps improvement, and intermodal traffic up 0.7 percent, a 50 bps improvement. Week ten performance displayed solid improvement versus last year.
These numbers continue to be not far off from the total traffic originated results of 3 percent for the first nine weeks of 2017 for North America rail traffic, 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. Additionally, U.S. traffic was up 2.5 percent and Canadian traffic was up 7.5 percent, closely tracking the carried rail traffic when combined.
Container traffic was up 0.8 percent, a 50 bps increase. Domestic intermodal pricing for both the west to east and east to west average has remained mostly flat week to week over the past couple of months. Compared to last year, pricing has been up in the high single-digits over the past few weeks as of the end of February.
Week ten witnessed weekly coal carload traffic at 101,000 carloads carried. This reflected a 12 percent increase versus last year. Coal is expected to be much stronger than in 2016. Grain performance was up 12 percent versus last year.
Motor vehicles and equipment carload traffic performance was down 2.6 percent versus last year. Chemicals remained flat, petroleum products were down 8 percent and crushed stone, gravel and sand was up 34 percent.
Source: Cass Information Systems, Cass Freight Index
President Trump has promised to reduce regulations and limit their increase in the future. The results of the Hours of Service (HOS) restart rule test failure will allow Transportation Secretary Elaine Chao to submit a study report to Congress to promote the pre-July 2013 restart rule to be in effect. This is a win for the trucking industry as the more stringent rule would have required drivers to take a single, 34-hour break, rather than a 34-hour restart within a weekly limit, and two consecutive 1 a.m. to 5 a.m. rest periods.
Dry van truckload pricing has remained down for the year, but has displayed some improvement the past few weeks. We are approaching April through May baseline lows set last year, so pricing on a year-over-year (YOY) basis is expected to increase.
The trucking industry has been mixed for 2017. Recent interim reports have suggested that the first quarter will likely continue to be challenged by soft demand and pricing. It remains to be seen how companies with different market exposure will perform; investors should continue to keep an eye on J.B. Hunt, Marten Transport (NASDAQ:MRTN) and Swift Transportation (SWFT).
For 2016, U.S.-based tons of enplaned air cargo finished the year strong, up 6.5 percent during the fourth quarter. For the year, performance versus last year improved by greater than 2 percent to 36.4 million tons enplaned.
Just over 50 percent of tons of enplaned cargo were delivered by both FedEx and United Parcel Service (NYSE:UPS). FedEx delivered 10.8 million tons of enplaned air cargo with nearly 60 percent being domestic; UPS delivered 7.7 million tons with 50 percent being domestic.
From a competitive annual rate of growth stance, UPS substantially outperformed FedEx for the Atlantic and Latin America trade lanes, as well as domestically. FedEx was dominant for the Trans Pacific trade lane. The domestic and Atlantic routes are most concerning for FedEx as the company remains the dominant market leader between the two. For 2017, initial global reports from air carriers have remained positive, suggesting that these trends may continue.
Container Shipping Lines
Source: Alphaliner - Top 100 Operated Fleets as Per March 18, 2017
Average spot market container pricing has continued its decline as of mid-March. Despite weekly declines, on a YOY basis, average spot market freight rates continue to be up substantially. Rates were up from 64 to 100 percent versus last year for eastbound traffic in the Trans-Pacific lane, up from 300 to 370 percent for eastbound-westbound traffic in the Asia-Europe lane, and remained moderately negative for the Trans-Atlantic lane.
The countdown for the new vessel sharing alliances continues. The big three will include M2, Ocean Alliance and THE Alliance. Upon a closer look at the service strings for these alliances, on-paper at least, many are proposing much faster transit times for many Asia-U.S. service. This has caused some concern for Matson's (NYSE:MATX) expedited China service (CLX). However, whether or not these transit times are realized still remains to be seen.
North America Seaports
Initial results for select North America seaport TEU traffic for February has been mixed. The ports of Los Angeles and Long Beach have both witnessed double-digit declines versus last year. The Port of Charleston has witnessed strong growth, while Virginia has been mixed for exports versus imports.
These early results may not be an indication of any one strong factor driving variation. As can be seen from February 2016, the baseline comparable is the toughest of the year. Therefore, there may be much more variation between performance. But it would make the most sense for the majority to witness declines.
March through September will be critical months to get a better sense of demand. This will also correlate to spot market pricing activity for container freight rates. If demand picks up, this should help offset the extreme declines witnessed last year in pricing.
North America Cross-Border Trade
Source: Yahoo! Finance
The iShares MSCI Mexico Capped (NYSEARCA:EWW) surged despite continued weakness for the iShares MSCI Canada ETF (NYSEARCA:EWC). The Mexico index is now up 14 percent for the year versus the 2.1 percent result for the Canadian index.
The clearest example of recent demand between the two countries is considering the truck and train performance entering the U.S. for the movement of goods. For 2016, trucks entering the U.S. from Mexico increased by nearly 5 percent; for Canada, the increase was approximately 2 percent. For trains entering the U.S., Mexico performance increased by 4.5 percent, while Canada witnessed a -7 percent decline.
Canada has continued to be impacted by the decline in energy-related volumes. Mexico continues to witness strong demand from the automotive industry, electronics and agricultural products. How the Trump Administration's position on future trade policies will be implemented is still an uncertainty.
The SPDR S&P Transportation index has turned negative for the year. The weakest performing industry of late has been related to trucking. Even so, all freight industries have remained highly mixed with performance on an individual company basis.
Demand trends have been positive for railroads, air cargo and container traffic, but the trucking industry continues to witness a soft demand environment. This is somewhat counter-intuitive as intermodal exchanges should have a correlation, and trucking is connected to many intermodal interchanges. But the improvement in energy is a strong driver for railroads, and retail demand may be off to a slower-than-expected start.
Disclosure: I am/we are long FDX, JBHT, 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 discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.