Time to Hop Off Transportation Stocks

by Daniel Putnam | February 7, 2013 9:15 am

Time to Hop Off Transportation Stocks

C.H. Robinson Worldwide (NASDAQ:CHRW[1]) isn’t exactly seen as a market bellwether, but its 10%-plus downturn on Wednesday may indicate that the time to take profits in transportation stocks has arrived.

C.H. Robinson is a multi-modal freight transportation and logistics company, which means it’s a good indicator of the health of the global shipping industry. It missed earnings estimates and offered a less-than-stellar outlook on Tuesday night, prompting Bank of America Merrill Lynch to cut the stock from buy to underperform the next day. Based on CHRW’s steady gain of nearly 30% from its July low through Tuesday’s close, investors didn’t see this headline coming.

CHRW isn’t the only stock in the Dow Jones Transportation Index to log big gains in recent months. Since Nov. 15, the iShares Dow Jones Transportation Average Index Fund (NYSE:IYT[2]) is up a cool 20% — way ahead of the 11.8% gain for the SPDR Dow Jones Industrial Average ETF (NYSE:DIA[3]) in the same period. Among other notable transpiration-related ETFs, SPDR S&P Transportation ETF Fund (NYSE:XTN[4]) is up 21.9% since mid-November, and the Guggenheim Airline ETF (NYSE:FAA[5]) is ahead 24.7%.

The table below shows what stocks have been driving the Transportation Index higher during this interval.

COMPANY TICKER RETURN, 11/15-2/5 COMPANY TICKER RETURN, 11/15-2/5
Railroads Airlines
Union Pacific UNP 13.5% Alaska Air ALK 14.6%
Norfolk Southern NSC 21.6% United Continental UAL 24.4%
Kansas City Southern KSU 28.1% Southwest LUV 27.6%
CSX CSX 12.5% Delta Airlines DAL 46.8%
JetBlue Airways JBLU 14.3%
Trucking
C.H. Robinson Worldwide CHRW 13.2% Marine Transportation
J.B. Hunt JBHT 15.8% Kirby KEX 29.9%
Landstar System LSTR 15.4% Matson MATX 26.6%
Con-Way CSX 20.7%
Transportation Services
Delivery Services Ryder System R 34.5%
FedEx FDX 21.6%
United Parcel Service UPS 14.9% Commercial Vehicles & Trucks
Expeditors International EXPD 20.8% GATX GMT 19.7%

Bold type for returns indicates outperformance vs. IYT.

As is typical, this rally has led to a great deal of media coverage on the implications of the transports’ significant outperformance. At these levels, however, it looks like the time is nearing to pull the plug on a broad sector bet.

This isn’t due to current fundamentals because U.S. shipping volumes are very healthy, even with the lower shipments of coal. And clearly, this sector is working right now. At the same time, however, the extent of its outperformance indicates that a measure of mean reversion is called for at this point.

The chart below shows IYT’s relative strength versus DIA. While the trend has moderated somewhat in recent days, it has gone on much longer than usual:

iytdia1 Time to Hop Off Transportation Stocks[6]

A rising line indicates outperformance; a falling line indicates underperformance.

Second, the straight-up move in the transports assumes that the U.S. economy stays on a track for recovery. This leaves the group vulnerable to weaker data, given that valuations are starting to become stretched after the recent-run up. The Transportation Index is trading at 20.8 trailing earnings versus 14.4 for the Dow Industrials, and 14.7 times 12-month forward estimates verus 12.5 for the DJIA.

This doesn’t leave much room for disappointment, as CHRW’s reaction to Tuesday’s bad news shows.

Finally, it’s worth noting that of the 20 stocks in the Transportation Index, 12 have seen their current-year earnings estimates decline in the past 90 days. While the cuts haven’t been substantial, the disconnect between index performance and the earnings outlook for the underlying companies indicates the role being played by momentum and investor optimism about the economic outlook — two factors that can turn on a dime.

What should investors do with this information? If you’re already in, consider tightening up your stops to protect your gains. And if you’re considering buying, there’s no rush. It’s likely that the weeks ahead will provide the opportunity to buy in at better price. For instance, $98, which marks the .382 Fibonacci retracement of the current rally, would be an interesting entry point for a trade.

In addition, those with the cash available can consider a paired trade — shorting IYT against a long in DIA. This enables investors to capitalize on relative underperformance for the Transports regardless of the direction of the broader market.

The bottom line: Transports have provided a great ride for investors in the past two-and-a-half months, but with 20% gains already locked in, this is no time to get greedy.

As of this writing, Daniel Putnam didn’t own any securities mentioned here.

Endnotes:
  1. CHRW: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHRW
  2. IYT: http://studio-5.financialcontent.com/investplace/quote?Symbol=IYT
  3. DIA: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIA
  4. XTN: http://studio-5.financialcontent.com/investplace/quote?Symbol=XTN
  5. FAA: http://studio-5.financialcontent.com/investplace/quote?Symbol=FAA
  6. [Image]: http://investorplace.com/wp-content/uploads/2013/02/iytdia1.png

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