Inflation in the United States continues to be near a 40-year high. To tame inflation, the Fed adopted a hawkish stance. The central bank, which has already hiked interest rates 225 basis points so far this year, is likely to announce a further 75-basis-point increase in rates at its meeting this week after the hotter-than-expected inflation reading for August. Higher interest rates shoot up the cost of borrowing, escalating the chances of an economic slowdown.
Geopolitical tensions between Russia and Ukraine, which flared up the fuel costs, further compounded the woes. The uptick in fuel costs is very damaging for the widely-diversified Zacks Transportation sector, as far as bottom-line growth of the stocks in the cohort is concerned. This is because fuel expenses represent a chunk of the total operating costs for any transportation player. Supply-chain issues and labor crunch are also hitting the sector players massively.
Due to the above-mentioned headwinds, the sector has declined 19.6% so far this year.
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Given the uninspiring YTD price performance of the sector, several transportation stocks are currently trading way below their 52-week high despite their strong fundamentals.
With market volatility and sector-specific headwinds unlikely to die soon, we believe that investors interested in the sector should keep tabs on stocks like Old Dominion Freight Line ODFL, Delta Air Lines DAL and Expeditors International of Washington EXPD. These stocks have declined significantly this year so far but boast a strong potential.
Rosy Demand Scenario Aids the Sector
With coronavirus-related restrictions easing, economic activities are picking up and people are resuming their pre-pandemic ways of life. The uptick in trade volumes brightened the demand scenario of transportation players.
For example, airlines in the sector are being well served as people are again taking to the skies, boosting passenger volumes in turn. In fact, airlines are still attracting healthy traffic even though the peak summer season has passed. This prompted some airlines to provide impressive top-line projections for the third quarter of 2022. The shipping stocks in the sector are also benefiting from a sharp rise in demand for goods and commodities.
Again, owing to healthy demand, the freight scenario is on the mend in the United States. The betterment is reflected by the Cass Freight Shipments Index’s growth of 6.6% month over month in August. The measure improved 3.6% year over year. The August reading was the best since May 2019.
3 Stocks to Keep Tabs on From Transportation Sector
Given the above tailwind, shunning stocks from the sector due to the prevalent market volatility and uncertainty won’t be a wise decision. We identified three transportation stocks with the help of the Zacks Stock Screener, which have a market cap of more than $10 billion and a Zacks Rank# 3 (Hold), currently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
These stocks are currently trading near their 52-week lows but have strong potential, having witnessed favorable earnings estimate revisions of late.
Old Dominion Freight Line has a market capitalization of $28.87 billion. This Thomasville, NC-based trucking company is being aided by the uptick in LTL (Less-Than-Truckload) shipments.
Shares of Old Dominion have shed 29.3% of value so far this year. ODFL is currently trading at $258.28, way below its 52-week high of $373.58 and close to its 52-week low of $231.31. The stock has witnessed a 2.45% northward revision of the Zacks Consensus Estimate for current-year earnings over the past 60 days. It has a Growth Score of A.
Delta has a market capitalization of $21.12 billion, presently. DAL, based in Atlanta, GA, is being bolstered by the uptick in demand for air travel (particularly for leisure).
Shares of Delta have shed 16.5% of value so far this year. DAL is currently trading at $32.94, well below its 52-week high of $46.27 and near its 52-week low of $28.09. The stock has witnessed a 1.1% upward revision of the Zacks Consensus Estimate for current-year earnings over the past 60 days. It has a Growth Score of A.
Expeditors has a market capitalization of $15.63 billion. This Seattle, WA-based freight forwarder is being bolstered by strong air freight revenues.
Shares of Expeditors have shed 33.4% of value so far this year. EXPD is currently trading at $93.17, way below its 52-week high of $137.80 and in proximity to its 52-week low of $90.08. The stock has witnessed a 3% upward revision of the Zacks Consensus Estimate for current-year earnings over the past 60 days. It has a Growth Score of A.
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