Transportation Sector On The Road To Recovery: 3 Stocks To Buy

It is a widely-circulated news that the headwinds associated with coronavirus have rattled stocks in the transportation space. Precisely, this broadly-diversified sector comprising railroads, truckers, shippers, airlines and package delivery companies among others was hit hard in 2020. However, the easing of coronavirus restrictions and the resultant uptick in economic activities, particularly in the United States, left a bullish impact on the transportation stocks. This is further evidenced by the Zacks Transportation sector’s growth of 8.2% so far this year.

Against this backdrop, let’s delve into the reasons responsible for this bullish price performance.

The improving freight conditions in the United States represent a huge positive for most corners like railroads of the transportation sector. The betterment in the freight scenario can be gauged by the  latest Cass Freight Shipments Index report, according to which shipment volumes increased 27.6% on a year-over-year basis in April. Notably, this record uptick last month was much higher than the 10% year-over-year rise recorded in March. Moreover, strong growth in airfreight revenues is a big boost to the freight forwarding companies in the sector.

The surge in e-commerce demand is aiding companies like FedEx (FDX - Free Report) and United Parcel Service (UPS - Free Report) . Notably, e-commerce refers to the method of buying and selling goods and services via a software platform. With the pandemic showing little signs of subsidence, e-commerce demand is likely to continue soaring in the near term.

The uptick in economic activities and trade volumes is also a huge boon for the shipping stocks, which are responsible for transporting a high proportion of goods involved in world trade. Within the shipping industry, the containership market reflects the brightest spot. The containership market is being aided by increased manufacturing activities in Asia in addition to inventory restocking and greater demand for goods rather than services in Europe and the United States.

The already high container rates were further pushed up by the Suez Canal crisis in March. In fact, shipowners like Costamare (CMRE - Free Report) are likely to gain further from the elevated rates as container capacity is likely to get even tighter due to the incident. Additionally, the northward movement of the Baltic Dry Index – a proxy for global dry freight rates across 23 routes – buoys optimism for the dry bulk market.

As the US economy is already on the mend, many transportation companies like Union Pacific Corporation (UNP - Free Report) and J.B. Hunt Transportation Services (JBHT - Free Report) approved a hike in their respective dividend payouts this year, thereby underlining their financial strength and confidence in the business.

Moreover, the recent uptick in air-travel demand (particularly for leisure) following more vaccination jabs in the United States, bodes well for the airline players in the sector.

In light of the above-mentioned upsides, we believe, transportation stocks currently boast attractive investment opportunities.

Our Picks

Here we narrow down to three transportation stocks that are well-positioned to benefit from the above-mentioned trends. Apart from sporting a Zacks Rank #1 (Strong Buy) or 2 (Buy) at present, these stocks are witnessing favorable earnings estimate revisions. Moreover, these stocks have outperformed the S&P 500 so far this year.

Our first pick is the Seattle, WA-based Expeditors International of Washington (EXPD - Free Report) . The stock, presently sporting a Zacks Rank of 1, is flying high on the back of improved airfreight revenues. The coronavirus-induced cancellation of multiple passenger flights (that usually carry freight as well as passenger luggage) increased the usage of charters. Due to the pandemic-led imbalance between scheduled capacity and demand, the company is compelled to use charters to meet customer needs.

We are also impressed by the company’s efforts to reward its shareholders. Notably, in May 2021, the company announced an 11.5% raise in semi-annual cash dividend to 58 cents per share. The Zacks Consensus Estimate for current-year earnings has been revised 15% upward over the past 60 days.

Our next choice is  Atlanta-based UPS (UPS). The exponential e-commerce growth rate in the current scenario is a huge plus for UPS, which currently carries a Zacks Rank #2. We are also encouraged by UPS' ability to generate solid free cash flow.

Over the past 60 days, the company has seen the Zacks Consensus Estimate for 2021 earnings move 17% north.

Old Dominion Freight Line (ODFL - Free Report) , a leading LTL (Less-Than-Truckload) company, is our final choice. The company currently has a Zacks Rank of 2. It is benefiting from an enhanced freight scenario and cost-cutting efforts. The stock has seen the Zacks Consensus Estimate for 2021 earnings being revised 9.5% upward over the past 60 days.

You can see  the complete list of today’s Zacks #1 Rank stocks ...

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