This is a good time to buy into this discounted stock, since most investors are missing its real value, and you can set up an easy dividend reinvestment plan to average in over the long term, writes Charles Carlson of DRIP Investor.

While a lot of investor attention is usually focused on the performance of the Dow Jones Industrial Average, it is the Dow Jones Transportation Average that might be the single best indicator for where the market is heading. The good news is that the Dow Transports recently advanced above their significant October highs, and look poised to move higher.

One stock that should lead the Transports higher is FedEx (FDX). The stock currently trades at an 8% discount to its 52-week high of just under $99 per share, and a 25% discount to its all-time high of just over $121 per share set in 2007.

The Dow Theory—a market-timing tool that looks at the performance of the Dow Jones Industrial and Dow Jones Transportation Averages—says that the current market trend is bullish. All investors should have some exposure to transportation stocks during bull-market runs, and FedEx represents a top play in the group.

To give you an idea of the size and scope of FedEx’s delivery network, consider the following facts:

  • FedEx estimates that from Thanksgiving Day through Christmas Eve last year, it delivered more than 260 million packages, or more than 97 packages delivered every second.
  • The firm moved those packages via more than 90,000 vehicles on the road, 680-plus planes, and such “unusual” delivery methods as boats, gondolas, electric tricycles, and hybrid and all-electric delivery vans.
  • The firm has shipped animals of all stripes and kinds, from two giant Pandas (Mei Lan and Tai Shan) from the US to China, to more than 70,000 endangered sea turtle eggs from the Gulf of Mexico coast to Florida’s Atlantic coast to protect them from potential oil-spill impacts.

The company has been shipping lots of stuff of late, as witnessed by its decent showing in the fiscal second quarter ending November.

Revenue rose 10% in the quarter to $10.59 billion. Net income rose 76% to $497 million. Results benefited from strong performance of FedEx Ground business, as well as improved profitability of FedEx Freight. Per-share earnings of $1.57 in the quarter beat the consensus estimate of $1.52.

Because so many significant unknowns—weather, fuel prices, global economic developments—can impact the company’s earnings stream in a big way, these shares typically show above-average volatility. However, for investors who are willing to ride through such volatility, I would expect the stock to provide decent returns.

The stock trades at 14 times the fiscal 2012 analysts’ estimate of $6.37 per share, not a bargain-basement valuation but reasonable given the firm’s leverage to an economic rebound in the US and globally.

The stock currently pays a quarterly dividend of 13 cents per share. I would expect dividend growth to be in the 8% to 10% range on an annual basis.

FedEx offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company. Minimum initial investment is $1,000, although the firm will waive the minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of at least $50 per month.

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