Before we consider investing at all, we have to frame the current general situation on Wall Street. The overall investor exuberance is simply astonishing. And the state of affairs across the planet is in shambles because of the novel coronavirus. So much so, that the United States government just unleashed almost $2 trillion in stimulus. This is a huge for a handful of industries that could use a boost, including transportation stocks.
Nonetheless, they wouldn’t do that if things were going swimmingly well. Believe it or not, it’s even worse abroad. I have family on three different continents and they are all overwhelmed and almost in panic. Through it all, though, equities are soaring — and that includes transportation stocks.
Overall, the indices are ignoring the risks and are still setting records. This bunch have been in a breakout since last fall when they finally overcame the September 2018 crash. Investors in general have never been happier because their stocks are breaking records every week. Just look at what’s happening to GameStop (NYSE:GME) as it doubled before the market opened. I usually like to invest in tickers after dips, and I’m struggling to find many these days.
That said, I want to consider a few transportation stocks to buy because they have seen better days. The sector is benefiting from what happened last year, so they should have a tailwind. Consumers are buying more online now than ever, so the demand on their services will persist. However, these stocks are down for no particular reason.
The three tickers are:
Even though this article is about transports, I am only considering the two largest delivery companies. They may be lagging the rails now, but they are still up big the past 12 months. And therein lies some of the opportunity in the catch up trade for FDX stock and UPS stock. In my neighborhood alone, the number of delivery vans has exploded higher. And last month, both of my UPS and FedEx drivers were using rented trucks for their deliveries. So I would even say they have never been busier, and that can only be a good thing.
Transportation Stocks to Buy: FedEx (FDX)
FDX stock had the opportunity to hold support near $275, then $260 per share and failed. Now, the bears are in control and it’s down almost 20% from the December highs.
Once they lost the neckline at $260, onus became on the bulls to take it back. Why? Because it may then bleed lower, risking more downside from here. The stronghold above was a legitimate attempt — but in the end, the sellers prevailed.
There is nothing wrong with the company, it’s just a bad stint for the FDX stock. This usually works itself out, and then the rally will restart. There is a chance that the pattern is targeting $230 per share, but there is strong support at $240. So if the markets hold up well this week, the bulls could rebuild some momentum. The bottom in any stock is usually a process so it may take a U-shaped form more often than not. There is enough value in this company for it to be worth the risk.
Fundamentally, FDX stock is not cheap at 27.7 price-earnings ratio (P/E), but it’s not bloated either. There isn’t a lot of fat to trim, especially after it’s lost so much already. And it’s reasonable to expect no debacles from here, so buying it is not likely to be a financial mistake in the long run.
Nevertheless, earlier I noted another $25 of downside potential if the right set of circumstances happen. Even if it’s a long shot, investors should only take a partial position. This way if things go wrong in the next two weeks, they have room to manage positions.
Overall, I favor using options. And instead of buying shares, I would sell FDX March $220 puts to start. For this I collect $4 to open the position today. And if this ends up being the bottom of the correction, then I’m already long. But if the slide continues, I won’t suffer any losses for another 15%. I like having a buffer working for me, and I get paid to be long.
United Parcel Service (UPS)
Usually I favor UPS stock to that of FedEx. You can clearly see why from looking at its price action versus its 2018 levels. It has been a been better investment for a few years. UPS management may be slightly sharper or luckier or both.
However, between these two investments, I prefer FDX stock to this one because it has less potential froth left in it. The potential downside risk in UPS is more obvious should the selling persist.
Investors can visually tell from looking at the chart that UPS is more precarious. I highlighted the slide opportunity inside of an oval (see chart above). It won’t take much to push UPS over an edge to cover the fast candles from last summer. If you look through a thousand charts, you’d find very few like this that were solid bases for upside.
In spite of how precarious is the technical setup, I consider it a solid investment in the long run. I am confident that it will find footing soon if not here slightly lower. And although I want all of my trades to work out quickly, I rarely seek timing perfection.
I know there is value in the company because it is growing sales and net income. It also pays a decent dividend while investors wait for capital appreciation. The forward P/E ratio is slightly high at 30, but there isn’t a lot of fluff in its price-sales ratio (P/S) of 1.72. What happened last year put incredible strains on the infrastructure of these two companies. They handled things well so both management teams have earned kudos in my book, and they deserve benefit of doubt in 2021.
Transportation Stocks to Buy: iShares Transportation Average ETF (IYT)
Instead of risking money on specific companies, sometime it’s good for investors to diversify the risk. One way to do this is by using sector ETFs. In this case, IYT stock offers a blanket trade on the transportation stocks — but is my least favorite of today’s stocks to buy. In fact, I’d avoid it until it reverts closer to $213 per share.
That said, I prefer betting on either UPS or FedEx for technical reasons. This is not to say that I’d be shorting the IYT because that would be crazy. This is an extremely bullish market with absolutely no fear in sight.
Moreover, the stock has been in breakout mode since late October. The 2020 Santa Claus rally came early and they finally broke out from the 2018 lid. They are now about 15% above that neckline, and I’d prefer a dip so not to be chasing too late.
Collectively, I understand the concept of momentum investing that buys high and sells higher. But this is not the ticker that I like for it. Unlike UPS or FDX, IYT is close to completing an upside target. It hasn’t even started its dip yet. Last week, there were chinks in the armor after disappointing action in Union Pacific (NYSE:UNP) and CSX Corp (NASDAQ:CSX). However, the damage is is not yet severe enough to impact the ETF.
For perspective, it’s important to note that UPS and FDX make up about 21% of the IYT ETF. Add to them the top three rails, and that accounts for more than half of it. They all had a nice run of late, and they can have red stints without changing the thesis.
They say don’t fight the tape, but in this case the markets are setting records. Yet, here we are looking for bottoms. I worry a little bit about buying something that cannot find footing in the most bullish market ever. It is still important to remain cautious especially when not many are watching the wheel on this crazy ride.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.