Transport stocks on Wall Street, down 11% in 2015 compared with the S&P 500’s 1.5% gain, might be oversold on sector-specific issues this week.

Reuters
New York


Though the stock market has broadly recovered from its August swoon, the same can’t be said of transport stocks. Continuing weakness in railroad and trucking companies have pushed the Dow Jones Transport Average index away from the S&P 500, a divergence that often is seen as a broad sell sign.
Not this time around, according to analysts. They say the transports, down 11% in 2015 compared with the S&P 500’s 1.5% gain, might be oversold on sector-specific issues rather than from a market-wide problem.
“There is no ‘sell’ signal as far as I’m concerned,” said Katie Stockton, chief technical strategist at BTIG in New York. “The divergence is certainly something to make a note of, in terms of your positioning in the transportation sector, but I don’t see it as a message in regard to the broader market.”
Analysts point to specific transports, such as United Parcel Service, FedEx Corp, and hard-hit railroads, down 25.1% this year, as places to bargain hunt.
The broad transport index, made up of 20 stocks that track the biggest US railroads, trucking and airline companies, is selling at a trailing price-earnings ratio of 16.7, compared with 20.42 for the S&P and down from the 19 level where it started the year.
“For investors who have a longer time horizon, that is more than a couple of months, we think the railroad stocks present compelling opportunities,” said Keith Schoonmaker, director of industrial research at Morningstar in Chicago.
“There aren’t going to be competitors encroaching upon their returns and they have a cost advantage over trucking companies,” Schoonmaker said. He singled out Union Pacific Corp for its diversified revenue portfolio and strong management team and said the stock has a fair value of $110. Union Pacific traded at $89.30 on Friday.
UPS and FedEx, down roughly 7% and 10% this year, respectively, as they head into the holiday shopping season, their most profitable quarter, could be bargains, said Art Hogan, chief market strategist at Wunderlich Securities in New York.
A handful of transport companies reporting results this week, such as FreightCar America, XPO Logistics and Atlas Air Worldwide Holdings, could post falling revenues and flat to negative earnings.
The Dow Theory, a decades-old method of market timing, holds that a broad index reaching a new high, such as the S&P did in May, should be viewed skeptically unless it is confirmed by the transport index – not the case this year.
That divergence is expected to persist. Though the transport index is often seen as a powerful reading on the broader economy, it is down this year as a function of specific problems.
Also, the transport industry is less indicative of broad economic weakness than it might have been in earlier decades, when manufacturing and shipping were a bigger part of the US economy, said BTIG’s Stockton.
Commodities, a key part of the rail business, remain beaten down.
While airlines have added capacity likely to reward them in the future, they are facing a short-term price war. Trucking firms, meanwhile, might be the weakest going forward.
Goldman Sachs slashed its 2015-17 North America truck production forecast by 14% on Thursday, citing further deterioration in truck freight volumes and continued weak trucker pricing.
“The downtrends there are very much intact,” said Stockton. “I think that would be a pocket of weakness for the transportation sector that for now you’d want to avoid.”