Keep Your Portfolio Truckin’ With The Transports

By Aaron Levitt | May 09, 2013 AAA

With most investors are keen to focus on the SPDR Dow Jones Industrial Average (NYSE:DIA), they may want to set their sights on a different index from Dow Jones. That would be the transports, and they are certainly cooking.

Transportation stocks- which include airlines, rail roads and freight carriers- have performed better than the broad market this year and there is plenty of indication that good times will keep rolling. For investors, despite the sectors recent rise, the transports could be the key to sector gains in the new year.

Pre-Recession Levels
It’s taken us a few years, but with the United States economic situation finally beginning to move in the right direction, freight traffic has been picking up steam. According to the U.S. Department of Transportation, its freight transportation services index jumped 2.7% in February on a year-over-year basis, while gaining 1.2% versus January’s numbers. This was the fourth consecutive month of increases. The DoT’s index measures output by a variety of means in the transportation sector- including railroad, air and trucking. However, over-the-road trucking continues shine as leading shipping method.

All in all, freight volumes are quickly approaching pre-recession levels.

That’s certainly bullish news for firms in the sector. As the recovery continues to progress forward and global industrial production keeps moving upwards, the transports will continue to benefit. Already we’ve seen profits at transport firms escalate since the beginning of the economic recovery as evident by Swift Transportation Company’s (NYSE:SWFT) recent robust earnings announcement. Many have handled the increased freight volumes without ramping up costs and many such as Arkansas Best Corporation (Nasdaq:ABFS) have re-priced contracts to reduce costs even further.

Given the bullish outlook on the U.S. economy and rising freight demand, the transports have clocked in a greater than 20% return this year. This compares to just more modest gains for the Dow Industrials and the S&P 500, which have risen by 14.5% and 13.6%, respectively.

SEE: Index Investing Tutorial

Yet, with the economic recovery still very much in the beginning stages in the U.S., the transports could be surging to new highs as the year progresses. Analysts at Jefferies believe the sector could tack on an additional 15 or more points of outperformance based on the historical swings in the index.

Moving Some Cargo
Investors looking to add the sector do have a variety of choices. Perhaps the easiest is the iShares Dow Jones Transportation Average (NYSE:IYT).The fund tracks the previously mentioned Dow index and includes shipping stalwarts like railroad Norfolk Southern (NYSE:NSC) and supply chain firm Ryder (NYSE:R). Like its tracking index, the ETF has risen nicely over the last year and currently sits at a 52-week high. Likewise, investors can use the SPDR S&P Transportation (NYSE:XTN).

Perhaps no single company has been a bigger beneficiary of the return of freight traffic than YRC Worldwide (Nasdaq:YRCW). The trucking company's quarterly loss was smaller than analysts expected and it reported an operating profit for the first time in over six years. That’s huge for the firm who was almost delisted and traded for about 3 cents back in 2011. While the company still has a lot of work to do, YRCW has made significant progress on its turnaround plan. For investors, the good news at the trucking company could continue as economic conditions improve.

SEE: Turnaround Stocks: U-Turn To High Returns

As one of the world's largest third party logistics (3PL) providers, C. H. Robinson (Nasdaq:CHRW) could be a great all-around play on rising freight volumes. The company provides freight transportation and logistics services to customers across the globe. CHRW works with 56,000 transportation companies- including railroads, trucking companies, ocean carriers and airfreight companies- to help customers get deliveries and shipments. That’s profitable business as C.H. Robinson has managed to improve revenues and income consistently over the last decade. That’s provider shares with a growing 2.4% dividend.

The Bottom Line
With the U.S. really beginning to move forward, investors may want to focus on the other main Dow index- The Dow Transports. The sector continues to rack up gains and many analysts believe that the sector will continue to outperform the broad market for the remainder of the year. For investors, that means loading up on the shippers, railroads and freight carriers.

At the time of writing, Aaron Levitt did not own shares in any of the companies or funds mentioned in this article.

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