If Gonzo journalist Hunter S. Thompson were alive and writing about the stock market this week, he’d probably title his story Fear and Loathing on Wall Street. While no sector has been immune to the global market sell-off, transportation stocks — particularly trucking companies –are vulnerable to the threat of a double-dip recession.
Trucking stocks have slipped an average of 6% since July 28. The only good news is the plummeting price of oil, which had sunk to less than $84 per barrel by Monday. But even lower oil prices are a double-edged sword for truckers: Prices are lower because demand is falling because of a weakening economy.
Trucking companies’ fear and loathing of another recession is rooted in the carnage wrought by the last one. As consumer demand fell, so did manufacturing output. And with fewer commodities and other goods to move, truckload volumes plummeted, eventually causing more than 1,800 companies to go out of business.
But the surviving companies came back stronger and with fewer competitors, truckload asset utilization is now about 97% — meaning there is very little excess capacity in the marketplace. The American Trucking Associations said its seasonally adjusted For-Hire Truck Tonnage Index increased 2.8% in June after falling 2% in May.
However, continued growth in the trucking market will depend on growth in the manufacturing sector — and therein lies the rub. U.S. manufacturing in July grew at its slowest level in two years, according to the Institute for Supply Management, indicating a slowdown in the economy and very bad news for the trucking industry. “The strength of truck tonnage in the second half will depend greatly on what manufacturing output does,” ATA Chief Economist Bob Costello said.
So what should investors do? Heed this advice from 17th century French philosopher Blaise Pascal: “In each action we must look beyond the action at our past, present, and future state, and at others whom it affects, and see the relations of all those things,” he said. “And then we shall be very cautious.” For investors, that means examining trends, assessing market conditions and weighing the fundamentals of stocks in the sector. So keeping Pascal’s word of caution in mind, here are two trucking stocks to roll with and two to park:
Roll
J.B. Hunt (NASDAQ:JBHT). At $40.22, J.B. Hunt is trading more than 25% above its 52-week low of $32.05 last August. With a market cap of $4.82 billion, the company has a price/earnings-to-growth ratio of 1, meaning it is fairly valued. The company’s return on equity, which measures how much cash is generated from the company’s existing assets, is a stellar 38.62% (12% to 13% is average). JBHT also pays a dividend yield of 1.2%.
Old Dominion Freight Line (NASDAQ:ODFL). At $30.06, Old Dominion is trading nearly 30% above its 52-week low of $23.14 last August. With a market cap of $1.71 billion, the company has a PEG ratio of 0.96, making the stock slightly undervalued. The company’s ROE is a solid 15.34%.
Park
Con-Way (NYSE:CNW). Despite higher quarterly earnings that only narrowly missed estimates, Con-Way stock has had a very tough row to hoe: Share prices have slipped nearly 30% during the past 10 days. Con-Way hit a new 52-week low of $25.82 on Monday — that’s more than 39% below its 52-week high of $42.38 just one month ago. With a market cap of $1.43 billion, the company’s 0.91 PEG ratio looks pretty strong, but its ROE is a mere 3.54%. Still, CNW pays a dividend yield of 1.4%.
Knight Transportation (NYSE:KNX). The stock hit a new 52-week low of $14.26 on Monday and is trading nearly 31% below its 52-week high of $20.65 last August. With a market cap of $1.17 billion, the company has a PEG ratio of 1.23 and an average ROE of 11.02%. The company has a 1.6% dividend yield.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
