The Transportation Sector: Three Contrarian Investments in a Battered Sector
by David Fessler, Energy & Infrastructure Expert
Friday, November 20, 2009: Issue #1142
As the old saying goes, “You’re either a contrarian, or a victim.”
It just so happens that one of the savviest contrarians I know is my colleague, Louis Basenese.
And nobody takes that to heart more than Lou does. I’ve scratched my head in bewilderment on many occasions after reading one of Lou’s bold predictions – only to see his intuition prove uncanny time after time.
So today I’m stealing a page from the “Basenese Playbook” and taking a look at the severely battered transportation sector, one that pretty much everybody hates. However, I think, it’s not only about to come off life support, but perhaps become one of the hottest investments in 2010.
The Transportation Sector: The Market’s Most Important Domain
Airlines, railways, package carriers, even oil and gas pipelines are all industries that make up the transportation sector.
But why should you care about it?
Because transportation is actually the most important sector – and for good reason: growth or contraction here serves as a proxy for both U.S. and global economic growth.
It stands to reason that if more “stuff” is being shipped, it means companies are producing more goods to satisfy business and consumer demand. In turn, this is a good indication that the U.S. economy – and that of the rest of the globe – is in decent shape.
Right now, however, there’s a big change underway in U.S. freight transportation. Thing is though, it’s hardly received any attention. So let’s take a closer look…
And the World’s Most Efficient Transportation System Is…
Let me toss a few statistics your way…
- Every day of the week, nearly 43 million tons of goods are hauled around the United States.
- The price tag of those goods is around $29 billion.
- This 12 billion ton-mile (one ton of freight moved one mile) occurs on the nation’s 4,016,741 miles of highways and roads, 94,942 miles of railroads and 26,000 miles of waterways.
- The process also includes thousands of miles of air routes and over 1.7 million miles of oil and gas pipelines.
- It accounts for nearly $400 billion – nearly 3% of total GDP.
When you think about it, the U.S. transportation and shipping system is highly efficient – and routine to the point of being almost boring!
But not from an investment standpoint.
An Impressive Nine Months for the Transport ETF… But the Rails Are Dragging
When the stock market hit bottom in March, so too did the transportation sector, as measured by the iShares Dow Jones Transportation Average (NYSE: IYT).
The ETF is a good proxy for the sector, as it tracks the Dow Jones Transportation Index (^DJT) and contains 20 companies that represent a diverse cross-section of the transportation area.
Year-to-date, IYT is only up by 11.4%. But since the fund hit its low of $38.28 on March 9, it’s blasted higher by 84.4%. That compares to a 57.7% gain for the Diamonds Trust (NYSE: DIA), its equivalent ETF that represents the Dow Jones Industrial Average (^DJI).
That said, some less than impressive third quarter earnings have prevented IYT from forging any higher. Notably, the rail firms have disappointed the most…
- Burlington Northern Santa Fe (NYSE: BNI): As I reported here a couple of weeks ago, BNI is soon to be part of Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) empire. But the firm announced a 30% drop in third quarter profit and doesn’t expect much improvement in the fourth quarter.
- Union Pacific (NYSE: UNP): The company reported a drop in freight volumes and a subsequent 26% fall in third quarter earnings.
- CSX (NYSE: CSX): fared the best of all with a 23% loss, beating Wall Street’s expectations.
The Intermodal Method: A More Strategic Way of Shipping
Fuel. A short word… but a big problem when it comes to freight transportation. It’s the biggest cost associated with the shipment of goods and is the bane of the trucking industry. When diesel prices hit $4-plus a gallon last year, for example, many smaller trucking companies simply vanished.
But the companies that remained – especially the larger ones – began looking for novel ways to reduce their fuel costs. And one of them includes intermodal shipping.
Intermodal freight – a shipping method that combines both highway and rail movement – is down over 17% from this time last year.
On the surface, this reflects the continued struggles for the U.S. economy and many others around the world, caused by declining demand from businesses and consumers. But there are a couple of rays of hope…
- Intermodal freight volumes have either been flat, or on the increase since June.
- Domestic container volumes have risen recently, too, albeit slightly (up 1.3% during the third quarter).
One reason that intermodal shipping is seeing an increase is the continued gloomy state of the trucking industry amid rising gasoline prices.
However, uncertainty remains. For example, there is still excess capacity and pricing is extremely competitive. As a result, trucking looks increasingly less attractive than intermodal – both as a means of freight shipment and, more importantly, as an investment.
America’s Green Twist on Efficient Freight Transportation
Other reasons why intermodal shipping is gaining traction include the fact that the method is more cost-effective and greener. For example, it uses 33% less fuel than shipping by truck alone. And most rail trains can move a ton of freight about 400 miles on a gallon of diesel.
In fact, increased savings was one of the major reasons that J.B. Hunt Transportation Services’ (Nasdaq: JBHT) CEO, Kirk Thompson, decided to ink a new intermodal deal with Norfolk Southern Corp. (NYSE: NSC).
“The conversion of highway freight to the more efficient, cost-effective, safer and more environmentally friendly services that we jointly provide, will not only benefit shippers and the general public, but our shareholders alike,” said Thompson.
The idea behind the deal is to accelerate the switch from truck traffic to truck-rail intermodal transportation for freight shippers.
Dave Yeager, CEO of The Hub Group (Nasdaq: HUBG), a freight company specializing in intermodal services and logistics, agrees: “We believe that business conditions are better and have become more stable. The future remains bright for intermodal due to the excellent service, a cost advantage over trucks, and the environmental benefits.”
We agree, too. And if you want to use this trend to play an economic recovery, consider picking up a few shares of J.B. Hunt, Norfolk Southern, or The Hub Group. They all stand to benefit as the economy continues to slowly recover.
Good investing,
David Fessler
Related Investment U Articles:
- You Can No Longer Trust This “Leading” Economic Indicator
- High Diesel Prices Mean Rail Stocks Might Be Ready to Run
- Berkshire Hits the (Rail)Road and Bags Burlington
- The Return of the Railroads: How This $78 Billion Industry is Bouncing Back
- Siemens’ High-Speed Rail: These “Cars” Get 700 Miles-Per-Gallon
2 Responses to “The Transportation Sector: Three Contrarian Investments in a Battered Sector”
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David Fessler is the energy and infrastructure expert for Investment U.
When you mention “Smart Money,” how is that defined, determined? I would like to understand that term better.
Mike
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Mike,
Smart money typically refers to experienced investors who have proven track records of spotting trends before the masses become aware of them.
Thank you,
Investment U
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