- Due to a critical divergence between consumer demand and shipment viability, transportation stocks are too risky for many investors.
- Knight-Swift Transportation (KNX): Down big this year, KNX may have difficulty repeating its otherwise outstanding financial performance in 2021.
- J.B. Hunt (JBHT): After pinging a very worrisome technical pattern, investors ought to head for the sidelines.
- Landstar System (LSTR): Like many transportation stocks, LSTR’s worrying technical pattern suggests investors should avoid the sector for now.
- United Parcel Service (UPS): With e-commerce sales as a percentage of total retail declining since 2020, UPS could be a wake-up call among transportation stocks.
- Union Pacific (UNP): Despite an okay performance given the circumstances, UNP stock has looked ugly of late.
- Danaos (DAC): Global supply chain disruptions will likely hurt the international shipping industry, boding poorly for DAC.
- TFI International (TFII): TFII is a benchmark for its North American operations and its hefty losses don’t spell great things ahead.
Although the Chicken Littles of the investment market have so far been proven wrong, it might not be appropriate to assume that this trend of inaccuracy will continue unabated if transportation stocks have anything to say about recent developments. Before the broader equity indices decided to end April on a sour note, the trucking industry pinged a concerning divergence.
Per TheLoadstar.com, the “US trucking industry has lost its swagger – demand and rates are still high, but tender rejections and pricing have trended downwards in recent weeks.” This dynamic is significant because according to FreightWaves.com, “Generally, but not always, tender rejections will be rising due to rising demand and volumes.” The current divergence between rising demand and tender rejections poses serious risks to transportation stocks.
But you’re asking, what exactly are tender rejections? This term describes “the percentage of electronic, contracted loads offered by shippers to carriers that are rejected.” Rising rejections may reflect a positive profile for transportation stocks because it indicates many fleet operators are already running at full capacity and can’t take on additional loads.
But when rejections decline yet end-user demand is sky high? That may imply severe structural disruptions — disruptions that may not be easy to resolve this time around. Therefore, investors ought to be careful about the following transportation stocks.
|UPS||United Parcel Service||$179.36|
Knight-Swift Transportation (KNX)
As you may know, Knight-Swift Transportation (NYSE:KNX) enjoyed a standout year in 2021, generating revenue of nearly $6 billion in 2021, up 28% against the prior year. Also, for the first quarter of 2021, it posted sales of $1.83 billion, up over 49% against the year-ago quarter.
So, why bother putting KNX on a list of transportation stocks to avoid? It really comes down to harsh realities impacting the broader economy, particularly inflationary pressures that impose sharp headwinds throughout the entire spectrum of the transportation sector. Importantly, this article isn’t about hating companies or shorting them: It’s about warning you ahead of time so that you can prepare a mitigating strategy.
To be fair, transportation stocks could bounce back if the Federal Reserve takes the actions necessary to reign in inflation. However, such tactics may take considerable time. For now, it may be best to avoid KNX.
J.B. Hunt (JBHT)
Another company to be skeptical of among transportation stocks is J.B. Hunt (NASDAQ:JBHT). A powerful brand in the sector, JBHT stock actually had a decent go of things throughout this year. But then, circumstances went squirrely for the equity unit in late March. As the dust settled on the final trading session for April, JBHT found itself down more than 15% year-to-date.
Even more problematic, its technical (price charting) profile is worrisome. After a sharp decline to kick off proceedings last month, JBHT appears to have charted a bearish flag formation — evidenced by pensive trading action following a massive bout of volatility. Usually, it’s a signal that forward momentum is about to give out, implying that investors should head for the sidelines.
Fundamentally, JBHT finds itself in the same boat as other transportation stocks. Several days ago, Ken Hoexter, the managing director of Bank of America’s trucking research, stated that “shippers’ view of demand is down 23% year-over-year. The bank’s proprietary Truckload Demand Indicator hit 58 — the lowest since June 2020.”
Landstar System (LSTR)
Another name among transportation stocks to avoid that has printed less-than-encouraging technical dynamics is Landstar System (NASDAQ:LSTR). After dropping to a range gyrating around the $155 level, LSTR stock plummeted sharply in the beginning of April. As the harsh overtones of the global economy started to weigh on the markets, LSTR to no one’s surprise received no exemption.
Now, here’s where things get interesting. After succumbing to the April 1 low, the subsequent rise higher initially suggests that the aforementioned session was the bottom. However, LSTR stock has only made its way back up the $155 level, which is problematic because it’s down 12% YTD; meaning, we really need to see LSTR make substantive progress to have confidence in the underlying company.
Unfortunately, the divergence between present consumer demand and tender rejections suggest that transportation firms are getting desperate. Such desperation would be extremely odd if indeed the economy were truly robust; that is, unless the economy was headed toward a recession.
In that case, no, declining rejections make perfect sense, which bodes poorly for LSTR and other transportation stocks.
United Parcel Service (UPS)
In theory, you’d imagine that the disruption of the coronavirus pandemic and the near-wholesale transition to work from home would be positive for United Parcel Service (NYSE:UPS). Basically, you have a hostage audience demanding online-sourced products either due to health concerns or convenience (or maybe both).
To be fair, UPS stock did very well during the new normal. When the initial doldrums of Covid-19 hit, yes, UPS was trading below $100. But in 2021 and even up until late March of this year, UPS routinely traded above $200. No longer. At the end of April, UPS closed the session at two pennies under $180, resulting in a YTD loss of nearly 16%.
What happened? Aside from the economic woes and supply chain pressures that have impacted transportation stocks, the new normal may not have been as great of a catalyst for UPS as some folks might think. For instance, e-commerce sales as a percentage of total retail sales peaked in Q2 2020. Since then, it has been a conspicuous slide downward, which doesn’t help UPS.
Union Pacific (UNP)
The devastation that has afflicted transportation stocks recently isn’t just centered on trucking companies. Indeed, railroad freight haulers like Union Pacific (NYSE:UNP) have been feeling the heat. In fairness, I should point out that UNP isn’t suffering as badly as other companies in the sector, down over 6% YTD. Given the circumstances, that’s an okay performance. However, it could get much worse.
As with the other transportation stocks to avoid, UNP’s technical profile looks unpleasant to put it diplomatically. From the Oct. 22, 2021 closing price of $235.31 to the 50-day moving average price of $252.92 (as of April 29, 2022), connecting these two points provides us with a rising linear support level. However, on April’s last trading day, UNP closed at $234.29, which is straddling the 200 DMA.
Needless to say, those who follow technical analysis know that dipping below this critical indicator could spell serious trouble later on. Fundamentally, if recessionary pressures hit, you’ll eventually see end-user demand fall, making good on the implications of the aforementioned divergence.
When it comes to transportation stocks to avoid, it’s not just the domestic region that’s impacted. Rather, the woes of transportation extend broadly, with the origination point stemming from the Covid-19 pandemic. However, the eastern hemisphere is again the source of myriad flashpoints, which presents endless frustrations for shipping firm Danaos (NYSE:DAC).
Let me just reiterate again that I’m not here to bash any of these companies, especially Danaos. If you take a look at the charts, DAC stock is actually up 17% YTD. It’s not just a sharp contrast to transportation stocks. Instead, Danaos is performing well, considering that the benchmark S&P 500 index is down 13%. So, why put DAC on this list?
From Russia’s invasion of Ukraine to China’s zero-Covid policy to the everyday frictions in the geopolitical realm, it all combines for structural demand troubles for Danaos and the shipping industry. As well, global inflationary pressures equates to reduced purchasing power almost everywhere, implying less future demand for shipped goods.
TFI International (TFII)
Finally, if transportation stocks represent the point where the economic rubber meets the road, you might want to take a look at TFI International (NYSE:TFII), which may end up being the ultimate benchmark, at least for American investors. That’s because the Canada-based transport and logistics firm operates primarily in the U.S., Mexico and of course its home market.
Put another way, TFI International serves the North American Free Trade Agreement (NAFTA). If supposedly we are the best block in the worst neighborhood, demand within the NAFTA arena should be relatively robust. Well, someone needs to tell that to TFII stock, which is down 23%, making it one of the worst-performing transportation stocks.
To me, this red ink is another example of the worrying divergence in the transportation industry. If the economy was booming, tender rejections would be up while TFII share prices would be skyrocketing because of its full operational capacity. Instead, rejections for the industry have tanked, while the underlying equity prices are also down.
That might mean that the current positive end-user demand is a fleeting affair.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.