Why Transports Are Moving

3/14/2016


For many transportation companies, fuel represents an outsized portion of operating expenses, making their shares vulnerable to rising oil costs. But a curious development has emerged since U.S. oil prices set a 12-year low in February. With per-barrel prices streaking 39% higher since Feb. 11, the Dow Transports have rallied 9.4%, slightly topping the Dow Industrials' 8.6% gain.

The price of oil has seemingly become a proxy for recession risk, and its recent rebound may have eased investors' fears about a downturn. Few pockets of the economy are more economically sensitive than transport stocks, so their rebound makes some sense.

However, oil tells just part of the Transports' story. Airfares have begun to fall, probably in response to airlines' rising capacity. Railroads' results rely heavily on other commodities, none more important than coal. CSX ($25; CSX), Norfolk Southern ($76; NSC), and Union Pacific ($80; UNP) said coal volumes fell more than 15% last year. With natural gas currently hovering near its lowest levels since 1998, demand for coal probably hasn't improved so far this year. Union Pacific projects a slight decline in coal volumes for 2016.

Nevertheless, profit-estimate trends for transport stocks remain relatively encouraging. About 37% of S&P 1500 transport stocks have seen their consensus profit estimates for the current fiscal year rise in the past 60 days, versus 33% of all stocks in the index. Analysts expect the average transport stock to grow earnings per share 6% this year, versus a 4% average for the broader index.

Some of the strongest gains in the S&P 1500 index this year have come from the transportation industries: The trucking industry index has gained 8% so far this year, followed by airfreight and logistics, up 3%. The railroad index has slipped 2% for the year, slightly better than the broad S&P 1500's 3% decline. Airlines bring up the rear with a 5% decline so far in 2016 — despite surging 13% since oil's February low. The other three industry indexes have rallied at least 5% since Feb. 11.

Conclusion

Despite encouraging signals from transportation stocks, the Dow Theory remains in the bearish camp for now. Breakdowns below the 2016 lows of 15,660.18 for the Industrials and 6,625.53 for the Transports would reconfirm the bearish primary trend under the Dow Theory.

After the flurry of rank changes, our buy lists still have 18% to 19% in a short-term bond fund. Top stocks in the transportation space are Alaska Air Group ($77; ALK), C.H. Robinson Worldwide ($71; CHRW), and Southwest Airlines ($42; LUV).


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