The performance of U.S. transportation stocks has dramatically trailed the broader market in 2015. So far this year, the Dow Jones transportation average is down 17 percent. Compare this to the Standard & Poor’s 500 index, which is nearly even, and the Dow Jones industrial average, which is down about 1.5 percent in the same time period.
Although it is normally a bearish sign to see the transportation average lagging the broader market, this year’s underperformance can be attributed mainly to the huge rise in the health care and consumer discretionary sectors. As investors begin to look for value in other sectors of the market, the transportation sector may be poised to catch up to some of its better-performing rival sectors.
The screen. We used the Recognia Strategy Builder to search for U.S. transportation sector stocks that are showing good earnings growth while maintaining reasonable valuations.
We began by setting a minimum market capitalization threshold of $5 billion to focus on larger, more established companies in the sector. Next, looked for companies with healthy business models as demonstrated by their growing earnings per share. We screened for companies forecast to grow their earnings per share this year by 5 percent or more based on analyst estimates. With the prospect of increasing interest rates on the horizon, we also wished to avoid companies that are burdened with high debt. We screened for companies with debt to equity ratios of 1 or less.
Finally, in order to pick stocks with reasonable valuations, we selected only companies with forward price-to-earnings ratios of 20 or less.
Delta Air Lines (ticker: DAL). Delta Air Lines has had a choppy stock performance this year; currently up about 2 percent year to date. The stock has solid fundamentals with a forward P/E of 14.5 and a projected EPS growth rate of 47 percent. Although up significantly at the end of October this year, the Paris terrorist attacks in November shaved almost 8 percent off the price of the stock. Based on fundamentals alone, this is looking like a good value for the intermediate term.
FedEx Corp. (FDX). Memphis-based FedEx Corp. also makes our list with a very low debt-to-equity ratio of 0.48 and a projected EPS growth rate of 57.9 percent. FDX stock has been on a roller-coaster ride — up more than 10 percent in November, but down more than 12 percent so far in December. The holiday season is traditionally among the most profitable for FedEx, with almost 50 percent of the company’s business now due to e-commerce. In addition, FDX stock is helped by positive expectations related to the company’s acquisition of TNT Express in Europe.
Union Pacific Corp. (UNP). Union Pacific Corp. is the largest company on our list with a market capitalization of more than $66 billion. This has been a dismal year for most railroads and Union Pacific is no exception. Declining commodity prices have pressured railway stocks and Union Pacific has seen its stock fall by almost 35 percent this year. This decline has left Union Pacific with a very reasonable valuation based on a forward P/E ratio of 12.7. UNP stock also has lower debt levels than some of its competitors, which may provide a competitive advantage if interest rates rise significantly in the next year.
C.H. Robinson Worldwide (CHRW). C.H. Robinson Worldwide is a multi-modal transportation and logistics company based in Eden Prairie, Minnesota. After hitting its 52-week low in late May, CHRW stock rebounded to a 10 percent increase earlier this month before giving away those gains as the market hit some recent weakness. Low fuel prices have been a benefit to many transportation firms and C.H. Robinson is no exception. In late October, the company announced third-quarter results that beat analyst expectations on earnings but missed narrowly on revenue. An improving U.S. economy should be beneficial to the company’s near-term fortunes. Analyst estimates call for a projected earnings growth rate of 31.9 percent for the coming year.
Historical performance. Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked over a five-year period. Using a three-month buy-and-hold strategy, the screen described had a 15.7 percent annualized return compared to 9.4 percent for Dow Jones industrial average and 11.3 percent for the S&P 500 index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
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