Stocks Decline Early On Housing; It's Time To Buy Transports

by: CRG Research

The housing market continues to show signs of recovery and stabilization as existing-home sales in February rose y/y. Gains in housing sales were led by strength in the South and Midwest. The interest rate on 30-year fixed-rate mortgages remained at a record low level. However, equities sold off early on news of a slow down in the pace of sales in February compared to January.

Equities closed for the most part flat with the S&P 500 (NYSEARCA:SPY) and Nasdaq (NASDAQ:QQQ) closing unchanged and the Dow Jones Industrial Average (NYSEARCA:DIA) declining. Overnight, the manufacturing PMI report out of China will be watched by investors for signs the world's second largest economy is recovering from a growth slowdown.

The Transports

The Dow Jones Transportation Average continues to trail the other major indexes as investors remain skittish about the near-term earning power of Transportation stocks. However, with earnings season beginning in April the Transport stocks have the least good news priced in and thus are the most poised to outperform.

The average continues to rise as price is above the 50-day simple moving average and the average continues to slope upwards. Investors will be awaiting Dow Theory confirmation of a continuation of the bull market.

Weighing on the Transportation Average today are, JetBlue Airways Corp. (NASDAQ:JBLU), United Continental Holdings (NASDAQ:UAL). Declines in revenue and net income in the previous quarter have weighed on JetBlue and United Continental as rising energy costs and good weather could shrink slim profit margins.

Expeditors International of Washington Inc. (NASDAQ:EXPD), Kansas City Southern (NYSE:KSU), FedEx (NYSE:FDX), Con-way Inc. (NYSE:CNW) and Delta Air Lines Inc.(NYSE:DAL) paced gains.

Expeditors International of Washington Inc. is up roughly 10 percent YTD. Earnings are expected to grow 12 percent next year. Return on equity is roughly 20 percent. The 50-day simple moving average is rising after a period of being flat signaling a change in trend from accumulation to mark-up or rising prices in line with the broader market.

Profit margins improved at Kansas City Southern in the third and fourth quarter of 2011. Gross profit was the highest in the fourth quarter. The stock is up just over 5% YTD and earnings are expected to grow by 18.73 percent. Return on equity is roughly 12 percent.

FedEx is reporting earnings tomorrow and is trading at 12.88 forward price/earnings. The quick ratio is 1.44 and current ratio is 1.52. FedEx is up almost 15 percent this year. The 50-day simple moving average is rising a sign that price is rising. Investors will be scrutinizing the earnings report for signs that the economic bell-weather sees slowing growth in the economy.

Con-Way saw a drop in revenue last quarter, however, net income (22.97) is well above Q1 levels (6.92). Forward price/earnings is 12.90 and price/sales is 0.36. The stock is up almost 17 percent YTD.

While Delta led gains in the Transportation Average today, the business model of the airlines is not attractive as an equity investor. Government regulation, weather and energy prices represent significant headwinds to capital preservation.

Expeditors International of Washington Inc., FedEx and Con-Way represent attractive investment opportunities before earnings. Kansas City Southern's upside may be limited.

Disclosure: I am long DIA.